How to Get the Best Interest Rate on Your Next Car Loan
When you get a car loan, the price of the car is only one part of the equation. The interest rate (APR) you secure is the single most important factor in determining the total cost of your vehicle. A lower rate can save you hundreds, or even thousands, of dollars over the life of your loan. Fortunately, your interest rate isn't purely a matter of luck; it's something you can influence.
This guide will walk you through four actionable steps you can take to secure the lowest possible interest rate and become an empowered, informed car buyer.
1. Check and Understand Your Credit Score
Before you do anything else, you need to know your credit score. This three-digit number is the #1 factor lenders use to determine your creditworthiness. A higher score signals to lenders that you are a reliable borrower, and they will reward you with a lower interest rate. You can check your score for free using services like Credit Karma or by requesting a free report from the major credit bureaus. Generally, scores are categorized as follows:
- Excellent Credit: 720 and above
- Good Credit: 660 to 719
- Fair Credit: 620 to 659
- Poor Credit: Below 620
If your score is lower than you'd like, consider taking a few months to improve it by paying bills on time and paying down credit card balances before you apply for a car loan.
2. Make a Larger Down Payment
A down payment is the cash you pay upfront for the vehicle, and it directly reduces the amount of money you need to borrow. From a lender's perspective, a significant down payment lowers their risk. Because you have more equity in the vehicle from day one, you are less likely to default on the loan. To reward you for this reduced risk, lenders will often offer you a better interest rate. Aim for a down payment of at least 20% for a new car and 10% for a used car.
3. Shop Around for Lenders
Many car buyers make the mistake of only accepting the financing offer presented by the dealership. This can be a costly error. To ensure you get the best rate, you should get pre-approved for a loan *before* you start shopping for a car. This gives you a baseline rate to compare against and shows the dealership that you are a serious buyer.
Be sure to get loan quotes from multiple sources:
- Your local bank: They often offer competitive rates to existing customers.
- Credit unions: Known for having some of the lowest rates available.
- Online lenders: These lenders have low overhead and can pass those savings on to you.
4. Choose a Shorter Loan Term
While a long loan term of 72 or even 84 months might seem appealing because of the lower monthly payment, it's often more expensive in the long run. Lenders typically offer lower interest rates for shorter loan terms (e.g., 36, 48, or 60 months) because their money is at risk for a shorter period. A shorter term ensures you pay off the car faster and pay less in total interest.
You can use our Car Loan Calculator to see exactly how different loan terms and interest rates will affect your monthly payment and the total cost of your loan.
Conclusion
Securing a low interest rate isn't about magic; it's about preparation. By checking your credit, saving for a healthy down payment, shopping around for financing, and choosing a sensible loan term, you can take control of your car buying experience. These steps will not only help you get the best possible rate but will also set you up for financial success long after you drive off the lot.