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Know what rates to expect to find the best deal.
The interest rate is one of the most important factors that impacts how much you pay for a new car. Generally you need strong personal finances to qualify for the most competitive rates. And it’s not the only factor to keep in mind.
What is the average interest rate for a car loan?
The average interest rate on a new car loan is 5.76% as of November 2018
However, that doesn’t mean everyone gets that rate. Rates vary depending on your credit score and whether you’re buying a new car or used car.
Where can I find a car loan with competitive interest rates?
Comparing the rates at different banks, credit unions and online lenders is critical to finding the lowest one out there.
Banks or credit unions. Since you have an established banking relationship already, it might be easier to get approved, even if you don’t have the best credit. These lenders tend to offer the most competitive rates.
Online lenders. Some online lenders borrowers with poor credit find a loan if they can’t qualify at their bank — though you probably won’t get the lowest rate available.
Dealerships. Local dealerships often work with all credit ranges but they sometimes inflate the interest rate to make a profit.
8 tips to get the best rate on your car loan
Finding the best car loan interest rate involves preparing and plenty of research beforehand with a potential to save thousands of dollars. These tips should get you started on your journey to scoring a low rate on your next car loan.
Before you start comparing loans, understand your credit report and how it impacts your finances. If you have multiple accounts open and have a high debt-to-income ratio, your application looks less favorable to lenders.
On the other hand, if you have a clean record and an excellent score, you’ll want to know how low your rate can get. Go into the car-buying process with your eyes open and a realistic goal in mind.
Applying for multiple loans around the same time isn’t likely to hurt your credit since multiple inquiries for the same type of loan are generally shown as one inquiry on your credit report. This means you can apply for preapproval from multiple lenders without committing and damaging your overall score. This makes it easier to compare rates and find a loan suitable for your needs.
When you compare your loans ahead of time, you could be preapproved at a low interest rate. This means you’ll have a tool to negotiate a low APR once you choose your next car.
Many buyers visit the dealer with an idea of how much they can pay each month. While this is great for your budget, it can lead to salespeople inflating the price of your car, usually by offering you a longer loan term — which equals paying more in interest. Your focus should be on the overall cost of the vehicle, that is, the sale price and the price you’ll end up paying at the end of your loan. Once you have this number, it’s much easier to determine what term length is best so you can handle the monthly payments.
If you decide to visit a car dealership without a preapproval, you’ll need to negotiate your interest and the price of the car. No matter how good your credit score is, you likely won’t be offered the lowest interest rate right off the bat. Dealerships are hoping you don’t question your rate, so come prepared knowing your credit score and the average rate you can get.
After researching, price shopping and comparing lenders, it might be tempting to take the first good interest rate that comes your way. Stay patient. Since your interest rate isn’t the only thing that impacts the final price of your car, spend the time determining how term length and vehicle cost change your budget. Most lenders offer a few days to decide on a loan and buy a car — you won’t be wasting time if you decide to take a moment to get your thoughts in order.
Like most loans, car loans are notorious for their legalese. You should know how your interest is calculated and any potential fees. You’ll also want to confirm that your loan isn’t conditional when you visit a dealer. Conditional means “subject to change,” so your loan isn’t finalized when you drive off the lot. Your terms can change, which could leave you with a worse interest rate on a loan you thought you’d got a good deal on.
Lenders prefer poor-credit applicants apply with a cosigner because they act as a guarantee for the loan — if you’re unable to repay, your cosigner is responsible. This not only lowers the risk for the lender, but it can result in a lower rate for you.
Even applicants with decent credit can benefit from a cosigner or joint application. The lender considers the credit and income of both parties when reviewing your application, giving you a better chance of approval for a more affordable rate. Because of this, your cosigner has to meet or exceed the lender’s eligibility criteria.
How do lenders come up with my rate?
Lenders don’t just rely on your credit when they decide your interest rate. The more well-rounded your application, the better your chances of scoring a low rate. Although there are other factors that may play a role in your interest rate, these are the four main points lenders consider when reviewing your application:
Credit score. Those with higher scores generally have access to lower rates, so improving your credit history is an important part of getting a low rate on your car loan.
Income. Lenders consider your income because it reflects your ability to pay back the loan. They’ll also want to see a low debt-to-income ratio to make sure you can afford your loan.
Loan term. The loan term impacts your interest. Typically, shorter terms of 36 and 48though you probably won’t get the lowest rate available.months have lower interest rates, but your monthly payments are higher.
Vehicle. Your vehicle’s make and model also plays a role in your interest rate, especially if you’re buying a used car. Since it’s likely your car will be used as collateral for the loan, lenders often charge higher interest for cars that are likely to break down.
Bottom line
At the end of the day, you can lower the total price you pay for a new or used vehicle by ensuring you’ve found a good deal on your car loan interest rate. When shopping for a new car loan, don’t forget to do your research on each part of the process. If you already have a car loan with a high interest rate and think you could qualify for a lower one, you may want to consider auto refinancing.
It’s possible, but it depends on your credit and the automaker. Often, you’ll need nearly perfect credit to qualify, and it’s usually only available for certain makes and models. Agreeing to a 0% APR auto loan may also mean foregoing other offers or promotions, like say a manufacturer’s rebate. Ultimately, if you qualify, you’ll want to crunch the numbers to make sure it’s the best deal for you.
Not necessarily. While a longer term can lower your interest rate and your monthly payment, you’ll likely pay more in interest overall. Carefully weigh your ability to make monthly payments with the final cost of your car to determine the best term length.
The longer your loan term, the lower your monthly payment. However, it makes the total cost higher. For example, if you borrow $15,000 for a used car and your lender offers you a 10.5% interest rate, your monthly payments and total interest can vary greatly.
Loan term
Monthly payment
Total interest
36 months
$487.54
$2,551.32
48 months
$384.05
$3,434.43
60 months
$322.41
$4,344.51
As you can see, your monthly payments are lower the longer you borrow, but you’ll end up paying about $1,000 more in interest each year your loan is outstanding.
Moreover, lenders generally charge lower interest rates for shorter loan terms. If you want to get the lowest rate possible, calculate your monthly car loan repayments and interest charges based on different loan terms. This helps you determine the minimum term you can afford based on your interest rate to save money.
Kellye Guinan is a writer and editor with finder.com and has years of experience in academic writing and research. Between her passion for books and her love of language, she works on creating stories and volunteering her time on worthy causes. She lives in the woods and likes to find new bug friends in between reading just a little too much nonfiction.
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