How to Get the Best Auto Loan Rates

Quick Answer

Car buyers can improve their chances of securing a low interest rate on an auto loan by reviewing their credit history and taking steps to improve it, comparing auto loan options, putting more money down and opting for a shorter repayment term.

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Auto loan debt reached a record high in the third quarter of 2021, according to Experian research, with the average auto loan surpassing $20,000 for the first time.

Now, it's more important than ever to do what you can to qualify for the best auto loan rates when buying a new or used car. Some of the steps to accomplish that goal include improving your credit, shopping around, putting more money down and choosing a shorter repayment term.

1. Check Your Credit

Before you start looking at cars, it's important to get an idea of your current credit health. You can check your credit score and review your Experian credit report for free to gauge how well your credit history holds up, and also pinpoint areas that you can address to improve your credit score.

This step is crucial because it tells you what you have to work with. If your credit score is 670 or above, it's considered good and can help you qualify for a good interest rate, but if you want access to the best auto loan rates, your best bet is to have a very good or exceptional score, which translates to a 740 or higher.

2. Take Steps to Improve Your Credit Score

Your credit report will inform you of the different ways you can improve your credit, but here are some best practices that can help you decide what to do:

Note that there are some credit report items you may not be able to fix. For example, missed payments remain on your credit report for seven years, and if they're legitimate, you can't remove them.

If you have some past items that you can't address, focus on what you can control before you apply. As your credit improves over time, you can refinance the auto loan at a later date.

3. Compare Lenders

It's common for car buyers to let dealers arrange their financing, which involves submitting your credit application to multiple lenders. But that might not help you get the best rate available to you, especially if the dealer adds an amount to compensate themselves for taking care of the financing for you, thereby increasing your rate.

Fortunately, some auto lenders allow you to get prequalified before you submit an application, letting you gauge what interest rates you might receive, and this process doesn't involve a hard credit inquiry.

Other lenders may require you to submit an official application, but if you complete your rate-shopping process within 45 days, FICO's newest credit scoring models will combine all of those inquiries into one for credit-scoring purposes.

As you compare interest rates, repayment terms and other features, you'll be able to narrow down your list of options to the best offer available.

4. Put More Money Down

Lenders consider a variety of factors when determining auto loan rates, and one of them is how much you're borrowing. A higher loan amount means a higher monthly payment, which could increase the chances of default.

As a result, you may qualify for a better interest rate if you put more money down on the purchase. Before you drain your savings, though, think about how a larger down payment could affect you in other ways.

For example, let's say the sales price of a vehicle you want to buy is $30,000, and you're considering a 60-month repayment term. A $10,000 down payment may get you an interest rate of 3.49%, giving you a monthly payment of $363.75.

But $10,000 is all you have in your savings account, leaving you vulnerable to financial emergencies that could come up. If you put down $5,000 instead, the lender may offer you a 3.74% interest rate, giving you a monthly payment of $457.49.

That's almost $100 more per month, but if you can afford it, it may be worth it to maintain a financial buffer.

5. Request a Shorter Repayment Term

Another factor lenders consider when determining interest rates is the length of the repayment term. Shorter repayment terms are more favorable for lenders because it reduces the risk that interest rates will increase significantly during your loan term, and therefore reduces the lender's opportunity cost of lending you money.

Of course, a shorter repayment period means a higher monthly payment, so make sure you can afford it without impacting your other financial goals and obligations. But in the end, it also means you'll pay less in interest.

The Bottom Line

Qualifying for the best auto loan rates can take time, especially if you've made some credit missteps in the past. But the effort is worth it when it can save you hundreds or even thousands of dollars in interest charges.

If you're thinking about buying a car soon, take the time to work through these steps to improve your odds of securing a low interest rate. If your situation is urgent, you may not have the time to do everything, but do as much as you can to maximize your savings.

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