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How to get a cheap car loan

How to keep money in your wallet and out of your lender's hand.

When you’re ready to buy a car and want to find the least expensive loan, you’ll want to take the time to compare your options — and learn what plays a role in the final price you pay. Finding a cheap car loan takes a bit of elbow grease, but it can be worth it if it keeps money in your wallet and out of your lender’s hand.

How can I get a cheap car loan?

Regardless of the rates and terms you see advertised, it’s often possible to get a better deal if you’re willing to negotiate. Here are some tips for reducing the interest you pay:

  • Shop around. If you take the time to compare offers, you’ll get a good idea of what interest rates you may qualify for from a range of lenders. This gives you plenty of ammunition when it comes to negotiating with your own lender, and even more when you’re ready to sit down with a dealer to get its potential loan terms.
  • Negotiate with your bank. If you want to stay with your own bank or credit union for your car loan, take your comparison shopping information with you when you apply. This will encourage the lending officer to see if there is any room to take a few extra points off the interest rate they offer you.
  • Negotiate at the dealership. When you apply for a loan through the finance officer at a car dealership, you have plenty of room to negotiate your rate. This is because dealerships often bump up the interest rate you’re offered to give themselves a better commission rate. If you walk in with a loan already in hand, your finance officer is likely more willing to negotiate.
  • Search for discounts. Some banks and credit unions offer a discount off their advertised rates if you have other banking products with them. Others — including online lenders — might offer a discount if you sign up for automatic repayments.

How much can I borrow on a car loan?

The amount you’re able to borrow varies by lender. Many have limits that range from $5,000 all the way up to $100,000 or the total cost of your car. However, how much you’re approved for will be dependent on your income, current debt obligations and ability to repay.

Many lenders offer preapproval to give you an idea of the rates and terms you might qualify for. However, you won’t know exactly what your loan offer will be until you fill out a full application.

How do I compare cheap car loan options?

Here are some factors to consider when comparing different car loan offers:

  • Interest rate. Your loan’s interest rate plays the biggest role in the total amount you pay. Rates can come in two forms: fixed or variable. Fixed rates stay the same throughout the life of your loan, while variable rates can go lower — or higher — every few months depending on movements in the market.
  • Loan term. Car loans can last anywhere from one to eight years. A shorter loan term can reduce the total amount of interest you pay — but your monthly payments will be higher. Use our car loan calculator to find the shortest term that allows for monthly repayments you can comfortably afford.
  • Prepayment penalties. If you want to reduce the amount you pay in interest, making extra payments can help. However, some lenders charge a fee for making extra payments or paying off your loan before the end of the term.
  • Origination fees. Many lenders charge an origination fee to cover the cost of establishing your loan — typically anywhere from 1% to 2% of the amount you’re borrowing.
  • Insurance requirements. Since your lender is using your car as collateral for your loan, it may insist that you have a full-coverage auto insurance policy or gap insurance in case your car is totaled. This can suck a few hundred dollars a month out of your budget, so take the time to compare insurance rates.

Case study: The cheapest rate doesn’t mean the cheapest loan

Imagine this scenario: Say John found a car loan for $35,000. Taking into account his down payment and the trade-in value of his old vehicle, he knows he’ll need a car loan for $25,000.

He checks out two different lenders’ websites to compare his options. The first lender offers an interest rate of 8.5%, while the second lender charges a higher interest rate of 8.75%. He doesn’t bother to compare other fees and goes with the first lender.

DescriptionLender ALender B
Loan amount$25,000$25,000
Fixed interest rate8.5%8.75%
Loan term5 years5 years
Monthly payment$512.91$515.93
Origination fee$500$250
Prepayment penalty$1,000None
Total amount paid$32,274.60$31,205.80

John chose to go with the first lender because of its cheaper interest rate, but it wasn’t necessarily the best deal. He plans to make extra payments off his car loan each month, but he didn’t take into account the prepayment penalty he’d be charged for doing this.

He also didn’t check how much the origination fee was. Those additional fees ended up costing him an extra $1,068.80 overall.

In this case, the loan with the slightly higher rate but far better loan terms ends up being the cheaper option overall.

How can I reduce my monthly payments?

Sometimes a cheap car loan means one that won’t take up a huge chunk of your budget each month — even if the amount you pay in interest ends up being a bit higher at the end of your loan. Here are some ways you can reduce your minimum monthly payments:

  • Find the lowest interest rate. By reducing your interest rate even a little, you should end up paying less on your monthly payments as well as less overall. This is one of the primary reasons why you should always take the time to compare rates before you apply for any kind of loan.
  • Borrow less money. It might sound obvious, but it’s true. If you can borrow less on your car loan — either with a good trade-in deal or a high down payment — you’ll owe less overall, lowering your monthly payment. For example, cutting your loan amount by $5,000 over a 5-year term adds up to $1,000 per year extra you don’t have to pay back, not including the interest you skip out on. This adds up to around $90 per month saved.
  • Choose a longer loan term. By extending your loan term, you’re spreading the amount you borrow out over an extra year or two. This reduces the amount you need to pay each month, but it also means you’re in debt longer. And you’ll end up paying more in interest than you would have with a shorter loan term that had higher monthly payments.

What are my cheap car loan options?

The type of loan you borrow plays a role in the total cost of financing your car. While there are a few routes you can take, the cheapest option is usually taking out a car loan secured by the car you’re buying.

    • Secured car loans. Most new and used car loans are secured, meaning your lender uses your car as collateral. Because they’re less risky for the lender — should you default, your car will be repossessed — you can generally expect a lower interest rate.
    • Unsecured car loans. Look into unsecured car loans, though these are much harder to come by. Unless you have good to excellent credit, this will be one of your most expensive options since your lender has little recourse if you default. If you want a cheap car loan, unsecured is probably not the way to go.
    • Car leases. Leasing your vehicle isn’t always the best long-term financial option since you won’t actually own the car you’re driving. But if you want to drive a new car every few years and don’t mind not having any trade-in value, leasing can be an easy way to keep your monthly payments low. However, over the course of a few leases, it may end up costing more than purchasing a car.
    • Personal loans. While not meant specifically for the purchase of a car, you can usually use a personal loan to finance a vehicle. Unless you opt for a secured personal loan, you’re unlikely to get a low interest rate or exceptional terms. Like with unsecured car loans, this typically won’t be the best way to go if you want a cheap deal.

    What will I need to apply for a cheap car loan?

    While the information and documents you need to provide varies by lender, you’ll likely be asked for the following:

    • Government-issued ID. This can include your driver’s license, passport, non-driver identification card or any other government-issued ID.
    • Proof of income. Recent pay stubs, tax returns from the past few years or bank account statements will typically suffice.
    • Employment details. This can include your employer’s name, address and contact details as well as your title within the company, how long you’ve worked there and your annual income. If you’ve only worked at your current job for a short time, your lender may want information about your work history for the past few years to show you’re able to maintain steady employment.

    You can often speed up the application process by having all of your documents on hand before you apply. Many lenders offer preapproval, which means you can check the rates and terms you might qualify for before completing a full application. This gives you the chance to compare cheap car loans to find the best one for you.

    Bottom line

    Finding a cheap car loan can make the difference between having a little extra cash to spend each month and cutting things a bit too close for comfort. When you’re on the hunt, comparing interest rates and terms from multiple lenders is key to finding the best deal out there.

    And remember to check out our guide to car loans to learn more about how it all works.

    Frequently asked questions about cheap car loans

    Can I include titling and registration fees in my loan amount?

    Yes, some lenders will allow you to add taxes, titling and registrations fees to the total amount you borrow.

    Are there any restrictions on the car I can buy?

    If you’re buying a used car, some lenders place limits on how old it can be or the number of miles it can have. There may even be restrictions on some makes and models, so check with your lender first.

    Can I buy a car from a private seller or will I have to go through a dealer?

    It depends on the lender. Many will allow you to buy from a private seller, but you’ll still need to provide details about the car. You may also get a less optimal rate if your lender is unable to inspect the car before you buy it.

    Does applying for a car loan affect my credit report?

    Yes. However, recent restructuring between credit bureaus means that loans of the same type — in this case, car loans — will be listed as one line on your credit report. This way, multiple applications won’t have too much of a negative impact on your credit score.

    How do I apply for a cheap car loan if I have bad credit?

    Many banks will decline a car loan application from a borrower with a bad credit history. However, there are some lenders out there that offer car loans specifically for people with less-than-stellar credit. You likely won’t qualify for the cheapest rates and terms, though.

    Image source: shutterstock

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