Your credit score, the car you buy and your lender all play a role in the cost of your auto loan. Finding the best place to borrow from requires multiple applications and more research before shopping.

But getting preapproved gives you more negotiating power at the dealership — and it could help you get a cheap car loan that saves you thousands of dollars over the loan term.

6 steps to getting a cheap car loan

Be prepared to shop by knowing your budget, credit score and ideal loan term. These steps will help guide you toward an affordable — and hopefully inexpensive — lender.

1. Know your budget

Experts recommend you spend no more than 20 percent of your net monthly income on auto loan expenses, including the monthly loan payment, fuel and other related costs. (The recommended maximum for new and used car payments is 15 percent and 10 percent, respectively.)

Ideally, you should walk into a showroom with an exact idea of how much you can afford, including the additional costs of car ownership.

Interest rates on new cars are usually lower than on used vehicles — but used vehicles typically cost less overall.

Bankrate tip
Stay within your budget while finding a car that meets your needs. Use sites like Edmunds and Kelley Blue Book for car price and reliability estimates.

2. Check your credit report

Lenders weigh your credit score heavily when evaluating your ability to repay a loan. The higher your credit score, the lower your interest rate. And if you’re trying to qualify for the best rate the lender offers, an excellent score is usually required.

You can pull your credit score and history from Equifax, Experian and TransUnion or for free at

Try and get your credit score in the best condition possible before applying for an auto loan. Some ways to build  your credit score include:

  • Filing disputes with the credit bureaus. If you notice any inaccuracies on your credit report, file disputes with the appropriate credit reporting agency right away. Negative information on your credit report that’s reported in error could drag your credit score down.
  • Getting current on any past due debt balances. Payment history accounts for 35 percent of your credit score, so it’s vital to bring any past-due accounts current and make timely payments on all your outstanding debt moving forward.
  • Reducing your unpaid debt balances. Aim for a credit utilization rate of 30 percent or less to help boost your credit score. You can also consolidate your debt to lower your credit utilization rate.
  • Avoiding new credit applications. Don’t apply for other types of loans and credit cards. Multiple hard inquiries within a short period could ding your credit score. In addition, your accounts’ average age impacts your credit score If you add a new account, the average decreases, which can cause your credit score to decline.

3. Add a co-signer if needed

If you’re applying for a car loan and your income is limited or your credit score is less than ideal, it can be far more challenging to qualify for a car loan. And if you do qualify, you may not be offered the most competitive best loan terms. Using a co-signer in this situation can be a smart move.

A co-signer is someone who agrees to pay your loan if you face any financial challenges or setbacks and cannot keep up with the debt service yourself. If you find a co-signer who has a better credit score or a stronger income, it may help you qualify for the loan or even for a more favorable interest rate that will lower your monthly payments.

Getting a car loan with a co-signer will also give you the opportunity to improve your credit score. You’ll need to manage the loan responsibly, make all your payments on time and pay the loan in full as agreed.

4. Get preapproved 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 your lowest rate is to get preapproved with several lenders. Preapproval requires providing personal and financial information to prospective lenders. If you’re preapproved for a loan, lenders will provide a formal offer letter.

Your preapproved amount and rate will let you calculate your monthly payment. Plus, if you do want to consider a car loan financed through a dealership, you can negotiate with a backup plan already in place and use the loan preapproval to pressure the dealer to give you the best offer possible.

5. Apply for loans within a 14-day period

Each credit application you submit results in a hard credit inquiry that dips your credit score by a few points and remains on your credit report for up to two years. That makes having too many applications in a short period problematic for your credit rating.

Fortunately, an exception to the rule applies for auto loans. Any loan applications submitted within a 14-day window count as a single inquiry, minimizing the dip in your credit score.

Remember that applications submitted after this timeframe could cause a more significant drop in your credit score and make you ineligible for the best rates.

6. 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 factor into the total cost of your new car. After all, the more you can pay upfront — and the less interest you pay overall — the cheaper your car loan will be.

Use an auto financing calculator to help determine the total amount of interest you will pay and your monthly payment. It is a useful tool, especially once you prequalify with multiple lenders and know 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 due to interest. Choose a loan with the shortest term you can reasonably afford to keep the total cost down.

Where to get the cheapest car loan

Dealerships work with banks, credit unions and online lenders to get you financing. To get the cheapest car loan, you should start your search with them to avoid paying extra interest for a similar loan.

  • Banks: If you already have an open account with a bank, look there for an auto loan. You may be able to score a relationship discount on top of a competitive interest rate. And because most dealers use banks for financing, you’ll get the same service without paying dealership markup.
  • Online lenders: Since online lenders must compete with banks and credit unions, they tend to have similar rates. Best of all, many work with borrowers with poor credit, so they can be a good place for a cheap loan if you lack an extensive credit history.
  • Credit unions: Because credit unions are nonprofit, they often offer competitive rates and similar loan terms to a bank. This means they’re one of the cheapest ways to get an auto loan. But since you need to be a member, it may take a few months — and an active account — before you’re able to apply.
  • Car dealerships: While car dealerships are known for marking up interest rates on the loans they offer, they also sometimes offer promotional deals with 0% APR  for buyers with excellent credit.

Next steps

Car loans are one of the biggest expenses most people will have, so put in the work to find the cheapest car loan possible.

Determine the monthly payment and total loan cost you can afford before signing off on a new set of wheels. Research current auto loan rates and prequalify with multiple lenders to ensure you get the best deal.