Negotiating a great price on a new car is just half the battle; you also need a great car loan to make it a great deal. To find the best auto loan rate, you’ll want to compare rates, terms and fees with at least three lenders, getting prequalified where possible. Loans vary by lender, the borrower’s credit and regional factors, so shopping around is the best tool you have.
Things to do before applying for an auto loan
It’s rarely a good idea to apply for the first auto loan you see. To ensure that you’re getting the best deal possible, take a few steps ahead of time to improve your finances.
1. Check and improve your credit score
The first step in this process is to get familiar with your own credit history. Your credit score is one of the biggest factors that determine your auto loan rate — the higher your credit score, the lower your rate.
There are many online options that allow you to check your credit score; your bank may even send you a free update every month. If you’d like a more detailed view of your credit health, you can also access your credit reports from each of the credit bureaus (TransUnion, Experian and Equifax) once weekly at AnnualCreditReport.com.
Minimum credit scores vary by lender, but you’ll typically need a score in the mid-600s to qualify and a score above 700 for the best rates. If your credit score needs work, take some time to improve it before applying for your loan by paying down existing debt, making timely credit card payments and avoiding any other credit applications.
2. Do your research
Online research is key when deciding which auto loan is right for you. An online car finance calculator can help you determine which type of financing is best for you, and reviews of auto loan lenders can help you narrow down your list of potential companies.
A few aspects to pay close attention to when researching loans are interest rates, repayment terms, required money down and any possible penalties that come with the loan. You can also look up lenders on the Better Business Bureau to ensure that the options you’re considering are trustworthy.
3. Limit shopping to a two-week period
Every time you apply for a loan, your credit score goes down slightly, which makes it more difficult to get a prime-rate loan. It is important to limit your loan shopping to a two-week period so that your applications count as only one inquiry.
4. Shop the total loan amount, not the monthly payment
The only time you should consider the monthly car payment is when you privately calculate how much you want to spend for your car. After that, don’t discuss monthly payments.
Some lenders may focus on the payments to induce you to borrow more money — advertising a lower monthly payment by extending the number of months you pay. That way they make more in interest and you have to drive your aging car longer. Instead, remain firm on how much you actually need to borrow based on the car you’re purchasing and work out repayment terms from there.
5. Compare car loan quotes
Once you have done your research and have a few options in front of you, it’s time to compare pricing. The best way to do this is to get quotes from a few companies, since the lowest APRs advertised on their websites won’t necessarily be the APR you’ll receive. By getting quotes, you can compare your actual offers side by side.
When you receive your quotes, pay close attention to both the APR and the repayment term. Even if a longer-term loan has a lower monthly payment, you’ll pay more in interest over time.
6. Read the fine print
After getting loan quotes, take time to look through the fine print. This is a binding agreement that will follow you for years, so you need to know exactly what you are agreeing to. Some aspects to pay close attention to are mandatory binding arbitration and prepayment penalties. Binding arbitration takes away any right you have to go to court with the lender if something goes wrong, and prepayment penalties are fees charged if you pay off the loan early.
Frequently asked questions about auto loans
What is conditional financing?
Conditional financing is a statement from your lender listing out conditions you must meet in order to receive your loan funds. If the financing is “contingent” or “conditional,” the lender can change your agreement later, leaving you with less advantageous terms. Never take a car from a dealer until the financing — down payment amount, interest rate, length of the loan and monthly payments — is finalized.
What is a good auto loan rate?
A good auto loan rate is generally any rate below average for your credit profile. For drivers with good credit, the lowest rates may be anywhere from 2.5 percent to 4 percent, while drivers with poor credit may see rates closer to 10 or 11 percent. This is why it’s so important to shop around; by doing so, you can choose among rates offered for your individual situation. Generally speaking, a good loan is one that has low fees and offers repayment terms that make sense for you.
How do you get preapproved for an auto loan?
You can typically get preapproved for an auto loan online. The lender will do a soft credit check and ask for basic financial details, including your Social Security number, employment status, state ID and income. In many cases, you’ll receive a decision from the lender in a matter of minutes.
Should you consider saving up for a down payment?
It’s usually best to save up for a down payment when applying for an auto loan. The two main perks to saving up for a down payment are getting a lower monthly payment and qualifying for better rates overall. Edmunds recommends aiming for 20 percent down, but the average down payment is closer to 11.7 percent.