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How to get the best auto loan rate

Man looks at a car in a showroom
Nestor Rizhniak/Shutterstock
Man looks at a car in a showroom
Nestor Rizhniak/Shutterstock
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Negotiating a great price on a new car is just half the battle; you also need an auto loan with competitive terms to make it a great deal. Loans vary by lender, the borrower’s credit and regional factors. So, shopping around with at least three lenders and getting prequalified is a surefire way to improve your chances of getting the most favorable loan terms on an auto loan for your new ride.

When comparing your options, be mindful of the interest rates, terms and fees proposed by each lender. It’s equally important to have your credit score into the good to excellent range — typically 670 or higher — to make yourself a good candidate for financing.

6 steps to take before applying for an auto loan

It is rarely a good idea to apply for the first auto loan you see — shopping around and getting your finances in order can help position you for a great deal.

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) 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. Otherwise, you could pay a fortune in interest if a lender does decide to approve you for an auto loan with a low credit score.

Loan Auto
Key takeaway
Improving your credit score can significantly lower your auto loan rate.

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 suitable 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 confirm the options you’re considering are trustworthy. 

Loan Auto
Key takeaway
Investigate potential lenders’ options, terms and customer reviews to make sure that they’re reputable.

3. Shop the total loan amount, not the monthly payment

Some lenders stretch out the repayment period on car loans and market the lower monthly payment to make the loan more enticing. But by doing so you could end up borrowing a much higher amount than you initially intended, and you’ll pay more in interest over the loan term.  

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.  

Loan Auto
Key takeaway
Shop around based on the amount you’d like to borrow — you can tinker with your repayment term and monthly payment later.

4. Limit loan applications to a two-week period

Every time you apply for a loan, a hard inquiry is generated. However, the FICO credit scoring model lets you shop around for a car loan within a 14-day window and counts all new applications for credit as a single inquiry. This is referred to as rate shopping and generally won’t hurt your credit score. 

Some lenders also offer prequalification tools on their website that allow you to view potential loan offers, payments and interest rates without affecting your credit score. If possible, get prequalified to determine the likelihood of getting approved with favorable terms before submitting a formal application. 

Loan Auto
Key takeaway
Limit your shopping period to reduce any negative impact on your credit score.

5. Compare car loan quotes

Once you have done your research and have a shortlist of preferred lenders, 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. Refer to the preapprovals you got in the last step if they’re still valid. Otherwise, resubmit your information for updated quotes. 

When reviewing 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. 

Loan Auto
Key takeaway
Compare interest rates and terms from at least three lenders.

6. Read the fine print

After getting loan quotes, 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 getting into. Pay close attention to the mandatory binding arbitration, prepayment penalties, loan processing costs and any other fees the lender may charge. Binding arbitration takes away any right you have to take the lender to court if something goes wrong, and prepayment penalties are fees assessed if you pay off the loan early. 

Loan Auto
Key takeaway
The fine print contains details about fees and restrictions that could add to the overall cost of your loan.

Frequently asked questions about auto loans

Here are the answers to some commonly asked questions that could help you get the best auto loan rate.

What is conditional financing?

Conditional financing is a statement from your lender listing the 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 5.5 percent, while drivers with poor credit may see rates between 9.5 and 20 percent. It’s essential to shop around so you can choose from rates that are workable for your financial situation. 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 conduct 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. You could get a lower monthly payment and qualify for a better rate. Edmunds recommends aiming for 20 percent down, but the average down payment is closer to 11.7 percent. 

Learn more

Written by
Rebecca Betterton
Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car.
Edited by
Student loans editor
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