5 Ways To Pay Less Interest on a Car Loan

Quick Answer

You can pay less interest on a car loan by shopping around for offers, making a large down payment, opting for a shorter loan term, making additional payments and declining extra coverage options.

Woman writing on notepad.

Increasingly, Americans are taking out long-term auto loans stretching 84 months and longer to help them get behind the wheel of cars they really want. But the longer your loan term, the more you'll pay in interest overall.

A better option is to pay less interest on your auto loan, which also means paying less in the long run for the same car. There are several ways to pay less interest on a car loan, including comparison shopping with lenders, making a larger down payment and getting a shorter loan term. Here are some details about these and other strategies:

1. Check Out Different Lenders

When you're buying a car, their finance department can shop and compare vehicle loans for you on your behalf. The drawback, however, is that dealers aren't obligated to offer you the lowest rates you're eligible for.

It may be advantageous to compare multiple loan offers before you visit the dealership. You can even apply for car loans on lenders' websites. Some lenders may even prequalify you with a soft credit check, which won't negatively affect your credit score. While applying with multiple lenders may involve some time and effort, the result could be a much lower interest rate that saves you money over the life of the loan.

Even if your best efforts don't lead to a substantially lower interest rate, all is not lost. If your credit improves or market rates drop, you may be able to refinance your vehicle later to get better terms.

2. Make a Large Down Payment

The more you borrow on your car loan, the more the lender is at risk if you default on your payment. When you make a sizable down payment or trade in your vehicle, you lower your borrowing amount and may even qualify for a lower interest rate.

For example, if you put $6,000 down on an $18,000 car, you would have to borrow $12,000 and pay interest on that amount. If your loan carries an interest rate of 5% with a loan term of 60 months, your monthly payment would be $226.45, and you'd pay $1,587.29 in total interest.

By contrast, if you didn't make a down payment and financed the whole $18,000 purchase price with the same interest rate and loan term, your monthly payment would climb to $339.68, with total interest charges totaling $2,380.93.

3. Get a Shorter Term Loan

Generally, lenders offer lower interest rates with shorter repayment terms because there's less likelihood you'll default on a 48-month loan than on a 96-month loan. Scoring a lower interest rate can help you save on interest charges over the length of the loan.

Keep in mind, however, that shorter repayment terms come with higher monthly payments. Make sure you can afford the monthly payments on a shorter loan before signing.

4. Make Additional Payments

When you pay more on your car payment, you're paying off your loan faster and reducing your overall interest charges. Here are a few strategies to make additional payments on your car loan.

  • Take advantage of extra income. Direct windfalls like a tax refund, work bonus or even a retroactive pay increase towards your car loan.
  • Round up your car payment. Rounding up your car payment to the next-highest $50 is a great way to lower your overall interest payments because you're reducing your balance at a faster rate without too much strain on your regular budget. For example, if your car payment is $265, consider sending in monthly payments of $300.
  • Make biweekly payments. Biweekly payments can also help you save more money on interest and pay down your car loan faster than you would by making monthly payments. By paying half of your monthly payment every other week, you make 26 half-payments or 13 total payments per year—one more than if you made one full payment each month.

5. Decline Options You Don't Need

When you finance a car, the sales team will typically offer several dealer options, upgrades and extras that can make your loan much larger. Some of these options include:

Make sure you completely understand what you're getting before agreeing to these options, as the added costs can drive up your total loan amount and overall interest charges.

Score a Lower Interest Rate on Your Car Loan

Like all creditors, auto lenders typically use credit scores to help them set the interest rates they offer borrowers, so boosting your credit score could help you snag a lower interest rate. Remember, lower interest rates come with lower monthly payments, which could help you afford an auto loan with a shorter repayment term.

Before buying a car, consider taking a moment to review your credit report and credit score to get a better view of your credit picture. Look for any inaccurate information or accounts you don't recognize on your credit report and dispute them with the credit bureaus. Also, consider using Experian Boost®ø to potentially raise your FICO® Score by receiving credit for paying your utility, streaming and other bills on time.

The purpose of this question submission tool is to provide general education on credit reporting. The Ask Experian team cannot respond to each question individually. However, if your question is of interest to a wide audience of consumers, the Experian team may include it in a future post and may also share responses in its social media outreach. If you have a question, others likely have the same question, too. By sharing your questions and our answers, we can help others as well.

Personal credit report disputes cannot be submitted through Ask Experian. To dispute information in your personal credit report, simply follow the instructions provided with it. Your personal credit report includes appropriate contact information including a website address, toll-free telephone number and mailing address.

To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through December 31, 2022 at AnnualCreditReport.