Negotiating a great price on a new car is just half the battle. You need an auto loan with competitive terms to make it a great deal. Loans vary by lender, the borrower’s credit and regional factors. Shopping around with at least three lenders and getting prequalified is the best way to improve your chances of getting favorable auto loan terms.

When comparing your options, be mindful of the interest rates, terms and fees proposed by each lender. If you can get your credit score in the good to excellent range — typically 670 or higher — you’ll make yourself a good candidate for inexpensive financing.

6 steps to take before applying for an auto loan

Try not to wait until you arrive at the dealership to secure financing. Although many dealerships shop your information around, you will be limited to loan offers from lenders in their network. That means there’s a chance the terms you receive may not be the best available to you. You may struggle to negotiate favorable terms with the dealer if you don’t already have an offer.

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 getting familiar with your credit history. Your credit score is one of the biggest factors determining your auto loan rate — the higher your credit score, the lower your rate. Borrowers with excellent credit have average rates of around 3.84 percent, while borrowers with poor credit average 12.93 percent, according to data from Experian.

Credit score Average interest rate for new car loans Average interest rate for used car loans
Source: Experian State of the Automotive Finance Market Q3 2022
781 to 850 3.84% 3.69%
661 to 780 4.90% 5.47%
601 to 660 7.25% 9.81%
501 to 600 10.11% 15.86%
300 to 500 12.93% 19.81%

You can check your credit score online, and your bank or credit card issuer 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 credit bureau (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 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.

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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 suits you, and reviews of auto loan lenders can help you narrow your list of potential companies. When exploring lenders, consider traditional banks, credit unions and online lenders as they all offer auto loans.

Pay close attention to interest rates, repayment terms, required money down and any fees and penalties that come with the loan. You can also look up lenders on the Better Business Bureau to confirm that your options are trustworthy.

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Key takeaway

Investigate potential lenders’ options, terms and customer reviews to ensure they are 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 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, avoid discussing monthly payments.

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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 online prequalification tools that allow you to view potential loan offers, payments and interest rates without affecting your credit score. You can take the process a step further by getting preapproved to receive a formal loan offer for a set amount. This means the lender has reviewed your credit history, and required documentation and decided you are a good fit for an auto loan. Most auto loan preapprovals are valid for 30 to 60 days.

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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, 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.

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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 binding agreement will follow you for years, so you need to know 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 removes your ability to sue the lender if something goes wrong, and prepayment penalties are fees assessed if you pay off the loan early.

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Key takeaway

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

The bottom line

Getting the best rate for an auto loan relies on your credit score and finances as much as the lender you want to borrow from. Shop around and know what the average rates are for your credit score before you apply.

This puts you in a good position to negotiate financing at the dealership — if that’s what you choose to do. And if you don’t, you will still be able to narrow down your options and select the lowest rate or best terms for your auto loan.

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Frequently asked questions

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