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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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Your credit score, the type of car you are buying and your lender all play a role in the cost of your auto loan. 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

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 pay no more than 10% of your income on your monthly auto loan expenses. 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.

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. 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.

Try and get your credit score in the best condition possible before applying for an auto loan. 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 banks, credit unions or online 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. 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 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.

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 have to compete with banks and credit unions, they tend to have similar rates. Best of all, many work with borrowers who have less-than-perfect 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.

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.

Research current auto loan rates before signing off on a new set of wheels. This will be a major factor in how much you pay, but you should keep your budget in mind when it comes to monthly payment and total loan cost to ensure the auto loan is cheap and affordable.

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
Auto loans editor