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How to get the cheapest car loan possible

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Woman wearing sunglasses while driving and smiling
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Finding an inexpensive car loan depends on factors like your credit score, the type of car you are buying and where you are borrowing from. Finding the best place to borrow from does mean multiple applications and more research before shopping. But getting preapproved gives you more negotiating power at the dealership — and it could save you thousands of dollars over the life of your loan.

4 steps to getting a cheap car loan

Your budget, credit score and ideal loan term will all play a role in finding a good loan. These steps will help guide you toward an affordable — and hopefully inexpensive — lender.

1. Know your budget

Experts recommend you pay no more than 10% of your income on your monthly auto loan payment. Ideally, you should walk into a showroom with an exact idea of how much you can afford, including the additional costs that come with car ownership.

Have a clear vision of the type of car you want to ensure you don’t overspend or get pushed toward a vehicle that is wrong for your lifestyle.

Make sure you can stay within your budget while finding a car that meets your needs. Research cars and pricing on sites like Edmunds and Kelley Blue Book for accurate estimates of car price and reliability. Interest rates on new cars are usually lower than on used vehicles — but that used vehicles typically cost less overall.

2. Check your credit report

Your credit score serves as a major factor for how lenders view your ability to repay a loan. When it comes to auto loans, the higher your credit score is, the lower your interest rate will be. This means cheap car loans start with having good credit. You can pull your credit score and history from Equifax, Experian and TransUnion or for free at AnnualCreditReport.com.

It is in your best interest to try and get your credit score in the best condition possible before applying for loans. Some ways to improve your credit score include paying down any unpaid debts, shooting for a credit utilization ratio of 30% or less, looking into debt consolidation and not missing future payments.

3. Prequalify with multiple lenders

Although most lenders use the same factors to determine your interest rate, they apply these factors differently.

The best way to find the cheapest deal based on your credit is to apply to prequalify with multiple lenders. Gather information from a few different banks, credit unions or traditional lenders and then compare the interest rates that they offer.

Shopping around will give you a grasp of what is out there. And once you have an idea of what you qualify for, you will have a better picture of what your monthly payment will look like. Plus, if you do want to consider dealership financing, you can negotiate with a backup plan already in place.

4. Do the math

While a low annual percentage rate (APR) is attractive, it is not the only number you should worry about. The trade-in value of your previous car, your down payment and the length of your loan term all go into the total cost of your new car.

Use an auto financing calculator to help you determine the amount of total interest you will pay and your monthly payment. It is an extremely useful tool, especially once you have prequalified with multiple lenders to see what rates you can expect.

Most car loans are available in terms of 24 to 84 months. And while a longer term results in a lower monthly payment, it costs more overall. Choose a loan with the shortest term you can reasonably afford to keep total cost down.

Next steps

Car loans are one of the biggest expenses most people will have. It is important to put in the work ahead of time to find the cheapest car loan possible. Research current auto loan rates before signing off on a new set of wheels. This will be the biggest factor in how much you pay, so keep your budget in mind when applying with multiple lenders.

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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
Auto loans editor