Buying a car is one of the biggest financial commitments most people make, and securing the right auto loan can mean the difference between a great deal and thousands of dollars in extra interest. While dealerships often push their financing options, savvy buyers know that shopping around and understanding loan terms can save significant money over time.
Auto loan rates depend on multiple factors, including your credit score, loan term, and the lender you choose. With rising interest rates and shifting market conditions, it’s more important than ever to be well-informed before financing a car. This guide will walk you through the best strategies for securing the lowest possible auto loan rates while avoiding common pitfalls.
Understanding How Auto Loan Rates Are Determined
Lenders determine your auto loan interest rate based on a variety of risk factors. Understanding these elements can help you take proactive steps to improve your chances of securing the lowest rate.
Credit Score: The Biggest Factor in Your Interest Rate
Your credit score is the single most influential factor in determining your auto loan rate. Lenders use it to assess the likelihood that you’ll repay the loan on time. Generally, the higher your credit score, the lower the interest rate you’ll be offered.
According to Experian’s 2023 State of the Automotive Finance Market Report, here’s how average interest rates break down by credit tier:
- Super Prime (781-850): 5.18% for new cars, 7.09% for used cars
- Prime (661-780): 6.40% for new cars, 8.75% for used cars
- Nonprime (601-660): 9.85% for new cars, 15.16% for used cars
- Subprime (501-600): 14.76% for new cars, 21.19% for used cars
- Deep Subprime (300-500): 19.21% for new cars, 25.03% for used cars
If your credit score is below 700, you may want to consider improving it before applying for a loan. A higher credit score can mean saving thousands of dollars over the life of the loan.
Loan Term: Shorter Terms Mean Lower Rates
The length of your auto loan affects the interest rate and total amount paid over time. While longer-term loans (such as 72 or 84 months) offer lower monthly payments, they typically come with higher interest rates.
For example, if you finance $30,000 at 6% interest:
- 36-month loan: $911 monthly payment, $2,800 total interest
- 60-month loan: $579 monthly payment, $5,000 total interest
- 72-month loan: $500 monthly payment, $6,200 total interest
Opting for a shorter-term loan can help you pay less in interest while building equity in your car faster.
New vs. Used Car Loans: Why Used Cars Have Higher Rates
Lenders view used cars as higher-risk than new cars, which is why interest rates are often higher for pre-owned vehicles. This is because used cars have lower resale values and are more likely to break down before the loan is repaid.
However, buying used is still a smart financial move, as depreciation on new cars is steepest in the first three years. If you opt for a used vehicle, consider certified pre-owned (CPO) options, which often come with manufacturer-backed warranties and lower interest rates.
How to Get the Lowest Auto Loan Rate
While auto loan rates fluctuate based on market conditions, there are several ways to secure the best possible deal.
1. Improve Your Credit Score Before Applying
If your credit score is below 700, consider taking a few months to improve it before applying for a loan. Even a 20-30 point increase can significantly reduce your interest rate.
To boost your score:
- Pay off credit card balances to reduce your credit utilization ratio
- Make all payments on time to build a positive payment history
- Avoid applying for multiple credit accounts in a short period, which can lower your score
Checking your credit report for errors is also crucial. If you spot inaccuracies, dispute them with the credit bureaus to potentially raise your score.
2. Shop Around and Compare Lenders
Many car buyers make the mistake of accepting the first loan offer from a dealership without checking rates from banks, credit unions, and online lenders. Comparing rates can save you hundreds or even thousands of dollars over the life of the loan.
Good places to shop for auto loans include:
- Credit unions: Often offer lower rates than banks (e.g., Navy Federal Credit Union, PenFed)
- Online lenders: Provide quick rate comparisons (e.g., LightStream, Auto Approve)
- Traditional banks: Best for those with strong banking relationships (e.g., Wells Fargo, Chase, Bank of America)
Get pre-approved before visiting a dealership. This gives you leverage to negotiate better financing terms and prevents dealers from marking up your loan rate.
3. Consider Refinancing if You Already Have a Loan
If you previously financed a car at a high-interest rate, refinancing could save you money. This is especially beneficial if your credit score has improved or market interest rates have dropped since you took out your original loan.
For example, if you originally financed at 9% interest but can now qualify for 5%, refinancing can lower your monthly payment and reduce your total interest paid. Just make sure your current loan doesn’t have prepayment penalties before refinancing.
4. Make a Larger Down Payment
Putting more money down reduces the amount you need to borrow, which can lower your interest rate. Lenders see borrowers with higher down payments as less risky, often rewarding them with better loan terms.
A 20% down payment is ideal, but even 10% can make a difference. The more you put down, the lower your monthly payments and the less interest you’ll pay over time.
5. Avoid Long-Term Loans and Dealer Add-Ons
While 72- or 84-month loans may seem attractive due to lower monthly payments, they often come with higher interest rates and leave you upside down on your loan (owing more than the car is worth).
Additionally, be cautious of dealer add-ons, such as:
- Extended warranties
- Gap insurance (often cheaper through your insurance provider)
- Dealer-marked-up interest rates
Always read the fine print before signing and negotiate terms when possible.
TL;DR: How to Get the Best Auto Loan Rates
- Check your credit score before applying and improve it if necessary
- Shop around with banks, credit unions, and online lenders before accepting dealership financing
- Get pre-approved for a loan to have leverage when negotiating
- Refinance your auto loan if your credit score has improved since your original loan
- Make a larger down payment to lower your interest rate and monthly payment
- Avoid long-term loans (72+ months) to save on interest and prevent negative equity
- Read the fine print and say no to unnecessary dealer add-ons
Taking the time to research and compare auto loan options can save you thousands of dollars over the life of your loan. By following these strategies, you’ll be in the best position to secure the lowest interest rate possible and drive away with a financially smart deal.
