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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 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.

5 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 that come with car ownership.

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

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 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:

  • 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 to 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. Refrain from applying for other types of loans and credit cards. Multiple hard inquiries within a short period could ding your credit score.

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 their interest rates.

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. 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. Hard inquiries also impact your credit score for up to 12 months, making 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.

5. 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.

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’re getting the best deal.

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