How to Get the Best Rate on an Auto Loan

In an ideal world, we would pay for our vehicles with cash in order to avoid paying the interest and fees associated with an auto loan. However, few of us have that amount of money sitting around and need to take out an automobile loan to pay for our wheels.

Know Your Credit Score

Before you start shopping around for an auto loan, get a copy of your credit report and score from all three credit bureaus. If you haven’t requested your credit report in the last year, you can get it for free; you will be charged a for your credit score, however. Look over your credit report to make sure there are not any errors. Small errors can make a big difference in your credit score and the auto loan rates you qualify for. If your credit is less than favorable, you will also have time to raise your credit score before you apply for the auto loan.

Different lenders have vastly different terms and rates, so it pays to shop around for the best auto loan rate. Each lender has their own criteria when they evaluate your credit score, so don't worry if your credit is not perfect. If you are not able to get a good interest rate with one bank, move on to the next. Talk with your regular bank, other banks, credit unions and even the dealership.

In general the financing offered by the car dealership is not the best choice because it often carries a higher interest rate and less favorable terms. However, once you get some quotes from other lenders, you can see if the dealership is willing to beat them. Don’t be afraid to leverage your different loan offers. You have a lot of negotiating power because the lenders want your business, especially if your credit is good.

Below you will see a comparison of auto loan interest rates from three different banks. You can see that the interest rates vary widely from bank to bank. It does pay to shop around!

While getting an auto loan with a zero or low down payment is attractive if you need a vehicle and don’t have a lot of money on hand, you will almost always end up with a higher interest rate. If you can, try to put at least 20% down in order to qualify for the best rates on your auto loan. Not only will you have a lower interest rate, you will also save money in the long run because you won’t be paying interest on the amount of your down payment.

The age of your car will affect the interest rate you pay as well. New car loans usually have a lower interest rate than used car loans. Keep in mind, however, that new car prices are also higher.

You can get a better interest rate by paying back your loan in a shorter amount of time. The monthly payments will be higher, but if you can afford it, this is the way to go. You will benefit from a lower interest rate and pay less interest overall.

In the table below you will see how the interest rate changes depending on the loan term and whether the car is new or used.

You can see from the above examples that there are many factors affecting your auto loan interest rate. By doing your research and knowing ahead of time how the banks determine your interest rate, you can get the best rate possible for your auto loan. The time you spend comparing interest rates and understanding the auto loan process will be well worth it when you have more money in your pocket.