6 steps to get the best auto loan rates

Negotiating a great sale price is just half the battle when shopping for a car. Also, compare auto loan rates to make it a great deal. Loans vary by lender, your credit and regional factors. Prequalifying with at least three lenders is the best way to get a car loan with favorable terms, potentially saving you thousands in interest.

Your credit is critical. A score in the good to excellent range — typically 670 or higher — will help you secure the best offers, but there are other strategies that can help if your score is lower than that.

How to get the best auto loan rates

Preparation can save you serious cash. If you arrive at the dealership with a good financing offer in hand, the salesperson will have to beat it if they want to finance your loan. In this way, consider dealership financing a backup option in your quest for the lowest interest rate possible.

1. Determine your budget

Decide what you can afford before applying for a loan.

• Review your current finances. Lenders consider your debt-to-income (DTI) ratio, income and credit score when determining whether you qualify for an auto loan.
• Consider the full cost of ownership. Aim to spend no more than 20 percent of your monthly budget on a car — including expenses for gas, regular maintenance and car insurance.
• Research the market. New and used car prices have increased over the last several years. Compare dealerships in your area, online options and sites like Edmunds and Kelley Blue Book for car price and reliability estimates.
• Save for a down payment. A large down payment will mean borrowing less, and less money borrowed means a lower monthly payment and possibly a lower rate.
• Request multiple trade-in quotes. Shop your trade-in with multiple dealers to get the best price and increase your total down payment.
• Check the total loan cost. Lower monthly payments are enticing, but they come with longer repayment terms that could cost you more over the life of the loan because of the additional interest payments.

2. Check your credit

Once you have a firm grasp on your budget, consider how your credit score will play into the ideal monthly payment you calculated. Your credit score is one of the most significant factors determining your annual percentage rate (APR).  Check your credit score to get started.

Minimum credit scores vary by lender, but you’ll typically need a score in the low- to mid-500s to qualify for a car loan and above 700 to receive the best car loan rates. If you have a low credit score and get approved for a car loan, you could pay a fortune in interest.

If your credit score needs work, take time to build credit to improve purchasing power before applying for your loan. Pay down existing debt, make timely credit card payments and don’t submit any other credit applications for home mortgages, lines of credit or credit cards.

3. Research auto loan lenders

To start narrowing down potential lenders, review auto loan rates, read Bankrate’s auto lender reviews and cross-check the Better Business Bureau.

There are multiple types of lenders, including traditional banks, credit unions and online lenders. You can also get a loan through the dealership, which will match you with partner lenders. When deciding which route best suits you, consider your preferred customer experience.

• Dealerships

  Dealership financing offers convenience. You can pick your car and finalize your loan in a single visit. You may also qualify for promotional APR deals through a captive lender. But avoid buy-here, pay-here dealers unless you have no other option.

• Banks

  Banks tend to offer great interest rates and large loan amounts. However, their qualification requirements are typically the strictest of any lender type — if you don’t have good credit, you may not qualify.

• Credit unions

  Not only do credit union car loans tend to offer lower rates than banks, but they also have a reputation for friendly customer service. You’ll need to be a member to benefit, which may require an application and deposit.

• Online lenders

  Online lenders often cater to bad-credit buyers, though they’re worth considering even if you have healthy credit. Some sites are marketplaces, allowing you to simultaneously receive and compare multiple offers. However, you’ll have to navigate the process without in-person support.

4. Prequalify and compare lenders

Prequalifying for an auto loan allows you to confirm your eligibility and check rates without submitting to a hard credit check. It’s a good way to start your shopping-around process, but you won’t be able to negotiate like a cash dealer.

The process of auto loan preapproval is more laborious because it requires more documentation. However, preapproval (unlike prequalification) lets you lock in your rate, usually for 30 days, while you shop for your car.

Since the lowest rates advertised on a lender’s website won’t necessarily be the APR you’ll receive from them, it’s recommended that you collect offers from at least three different lenders. That way, you can draw a true comparison. Aside from the APR, look at:

• Loan term: A longer loan term means smaller payments, but also paying interest for longer. A shorter term will save you money.
• Vehicle restrictions: Lenders set restrictions for vehicles they will finance based on criteria such as age, mileage, and model.
• Speed of funding: Some loans fund quickly, while others may take a few days to process an application and fund your loan.
• Lending fees: Look for a lender who does not charge origination fees or prepayment penalties.
• Add a co-applicant: A cosigner or co-borrower with a good credit score can help you get approved for an auto loan or qualify for a better rate, but not all lenders allow joint applications.

5. Read the fine print

An auto loan is a binding agreement that will follow you until you pay it off, so you need to know what you’re agreeing to.

The Truth in Lending Act (TILA) requires lenders to disclose the cost of borrowing money, the interest rates and fees upfront in a manner that’s easy to understand. This protects you from harmful lending practices. Steer clear from lenders who try to hide or gloss over this information.

Pay close attention to the mandatory binding arbitration, prepayment penalties, loan processing costs and other fees the lender may charge. Binding arbitration removes your ability to sue the lender if something goes wrong, and prepayment penalties may be assessed if you pay off the loan early.

6. Finalize your auto loan

Confirm the terms with your lender once you’ve found the right auto loan. Before signing, you must submit required paperwork, including proof of insurance.

• Sign the loan contract: If you have a co-borrower or cosigner, they will also need to sign the contract. If you have an auto loan from a dealership, the dealer will provide the lender’s contact information on the contract.
• Get the vehicle title and registration. You must have your vehicle title sent to the lender and the vehicle’s registration updated to your name. The dealership will usually take care of this. If not — or if you’re buying from a private seller — work with the seller and DMV to update the necessary documents.
• Take possession of the vehicle: While your lender will be the lienholder, you will be the official owner in charge of maintenance costs and general upkeep.

Bottom line

The three main factors in getting the best rate for an auto loan are your credit score, finances and the lender. In advance, survey average interest rates for your credit score, and compare the rates and terms offered by several lenders before you apply.

This will put you in a good position to negotiate financing at the dealership — if that’s your choice. And if you don’t want to go with dealer financing, you can still narrow your options and select the lowest rate or best terms for your auto loan.