Once you’ve decided on the car you want and the amount needed to purchase it, research is key. If you skip this step, you might end up at the dealership (or online) hastily agreeing to a longer term, higher interest rate, or unnecessary add-ons. By doing side-by-side loan comparisons, you’ll clearly see the best method for purchasing your vehicle.
Loan rates vary based on several factors, including lender, credit score, term length, interest rates, debt-to-income ratio and loan-to-value ratio. In a global economy with fluctuating interest rates and rapid changes in automotive technology, being an informed consumer is more important than ever.
We’ve assembled tips to help you find the best auto loan for your needs — whether you’re looking for long-term financing or an immediate solution. Auto buying and financing go hand in hand. Being proactive and prepared will help you lock in the best interest rate and loan terms possible.
Credit Score: The Main Factor Influencing Interest Rate
The three credit bureaus — Experian, Equifax and TransUnion — determine your credit score, which is the single most important factor in setting your auto loan rate. While some companies will charge you for credit reports, you can get yours free once a year at AnnualCreditReport.com. Just complete the form, and you’ll receive a full report with data from all three bureaus. You can also download https://www.creditkarma.com/ for free and see your Equifax and TransUnion
Even for example in the case of Credit Karma, with only two bureaus available to you, you can see an overview of your credit standing, debts owed, and any significant changes (e.g. hard pulls, late payment, etc.). This will help you better understand how the bureaus work and how your own fiscal policies affect your credit rating. In addition, by monitoring your score, you have a greater grasp on your financial health which will help you prepare for major purchases such as your next car.
According to Experian’s 2023 State of the Automotive Finance Market report, average interest rates by credit tier are:
- Super Prime (781–850): 5.18% for new cars, 7.09% for used
- Prime (661–780): 6.40% for new cars, 8.75% for used
- Nonprime (601–660): 9.85% for new cars, 15.16% for used
- Subprime (501–600): 14.76% for new cars, 21.19% for used
- Deep Subprime (300–500): 19.21% for new cars, 25.03% for used
Interest rates significantly increase further below you are under a 700 score. This is why it makes sense to improve your credit before applying for a loan. The higher the tier, the lower your interest rate. A lower interest rate can save you thousands over the length of the loan.
Loan Term: Shorter Terms Mean Lower Rates
Shorter loan terms (24–48 months) typically come with lower interest rates compared to longer terms (60–84 months). Although longer terms may lower your monthly payment, they result in paying more interest overall. That extra money could be better spent elsewhere — like on a mortgage or student loan.
For example, on a $30,000 loan at 6% interest:
- 36-month loan: $911/month, $2,800 in total interest
- 60-month loan: $579/month, $5,000 in total interest
- 72-month loan: $500/month, $6,200 in total interest
The 72-month loan costs 121% more in interest than the 36-month option. And considering a new car loses around 12% of its value as soon as you drive it off the lot, shorter terms make more financial sense. If a longer term is necessary, pay extra toward the principal whenever possible.
Consider Getting Prequalified vs. Preapproved
Some lenders offer either prequalification or preapproval —either one of these can be beneficial while shopping for
- Prequalification refers to an estimate for financing given by a lender based on borrower-provided information.
- Pre-approval is also based on information provided by the potential borrower, but it also requires a full credit check and financing application. If you receive the pre-approval you have a pretty good idea of the interest rate and loan terms you can get for your car.
Why preapproval matters:
- Preapproval allows you to be one step ahead in the process – you are shopping knowing what to expect!
- You are less likely to be subject to the sales tactics at the dealership, from the owner, etc.
- Preapproval buffets against unfavorable financing or last-minute surprises that increase the loan.
While prequalification is helpful, preapproval is the preferred method. If you decide to go this route, we recommend obtaining preapproval from multiple lenders within a 14–30-day window of purchase. This timeframe will minimize the impact on your credit score as it is often treated as a single inquiry by lenders who understand the need to make comparisons.
New vs. Used Car Loans: Why Used Cars Have Higher Rates
Something I have always wondered is this, “Why do new cars usually come with lower interest rates than used cars?” This is due to the higher resale value and lower risk of new cars. Used cars often break down before the loan ends, making them riskier to finance. I know I have experienced this before…twice!
That said, used cars still offer value — especially since new cars depreciate the most in the first three years. Research both the car and loan to estimate the vehicle’s life and match it to a realistic term. Certified pre-owned (CPO) vehicles are often a smart choice because they’re backed by manufacturer warranties and may qualify for better rates. I chose this option for my current car, and it is still running well 16 years later!
Understand Loan-to-Value (LTV) Ratio and Its Impact
Nerdwallet.com defines loan-to-value ratio, or LTV, as the amount you want to borrow divided by the value of the car you want to buy. This is an important metric for lenders in terms of evaluating you as a borrower. In general, the lower the LTV, the better the loan terms.
For example, if you’re financing $24,000 on a $30,000 car, your LTV is 80%. This would be an attractive LTV for a lender as most lenders prefer an LTV under 100%. Their reasoning is that you already have some ‘skin in the game’; hence, the risk is not all on their end in extending the loan to you. On the other hand, a high LTV (like 110% or more) is what lenders consider to be “underwater.” This means you owe more than the car is worth, which is a big risk to lenders. As a result, they implement higher interest rates for the loan or in some cases may refuse not to offer financing.
Pro tips to lower your LTV:
To lower your LTV, we recommend you do the following”
- Put down more money for the loan.
- Choose a car that historically has displayed a strong resale value.
- Forego all add-ons that unnecessarily increase the loan amount.
Avoid Common Loan Pitfalls
It is important that you do not allow yourself to be subject to loan terms, add-ons and warranties that will cost you unnecessarily. Make sure you to do not succumb to these potential pitfalls
- Long-term loans with low monthly payments: These are presented to appeal to your desire for lower monthly payments. It may sound appealing, but interest compounds over time.
- Dealer add-ons and warranties: These can often be purchased separately for less.
- Rolling negative equity into a new loan: Do not add a new loan tf you owe money on your current car. Instead, pay your car off.
- Focusing only on monthly payments: Just because the monthly payment is good in your estimation, it does not mean the loan is structured in your favor long-term. Always evaluate the total cost of a loan.
Most importantly read and make sure you understand all the terms of your loan. If you have questions, ask and do more research. Make sure you know what you are signing since you will be accountable for paying off the loan by the designated timeframe.
Time Your Purchase Strategically
Timing is important when buying your car. Loan rates, while affected by the fed, are constantly fluctuating. Therefore, it is wise to consider these factors in terms of timing:
- End of the month, quarter or year: Better financing is often during this time since dealers often have new sales goals.
- Model-year-end clearance events: You may get better manufacturer incentives or 0% financing offers.
- Federal interest rate trends: Lock in interest rates in anticipation that the interest rates are climbing. If there is an expectation of reduced interest rates, in the future, that is also an option as well.
Furthermore, tax seasons and holiday weekends also see special promotions. Make sure you are on the lookout for these during that time.
Practical Steps to Get the Lowest Auto Loan Rate
We’ve compiled key steps to help you secure the lowest rate:
- Boost Your Credit Score
If your credit score is below 700, improving it can reduce your rate significantly. Even a 20–30-point jump makes a difference.
To boost your score:
- Pay down credit card balances monthly.
- Keep credit utilization below 30% per card.
- Avoid multiple hard inquiries in a short time.
- Check your credit report regularly to catch errors.
- Research and Compare Lenders
Don’t rely solely on dealer financing. Compare interest rates and terms from:
- Credit unions: Consumer Credit Union, PenFed, local credit unions
- Online lenders: Quicken Loans, Loan Depot, LendingTree
- Traditional banks: Chase, Bank of America, community banks
Getting preapproved gives you leverage and protects against in-the-moment upsells.
- Refinance if You Already Have a Loan
If rates have dropped or your credit has improved, refinancing could save you money. Check with your credit union, bank or an online lender. Always read the fine print and make sure the terms align with your goals. - Make a Larger Down Payment
A larger down payment reduces the total amount you need to borrow, which can lower your monthly payment and interest rate. It also shows lenders you’re serious about repayment, which may earn better terms.
While 20–25% down is ideal, even 10% can positively impact your loan. Use auto loan calculators to find the sweet spot for your situation.
Ensure You Get the Best Auto Loan Rates by Doing the Following:
- Check and improve your credit score before applying.
- Choose short-term over long-term financing to reduce interest.
- Compare offers from banks, credit unions and online lenders.
- Get preapproved to position yourself for better deals.
- Refinance your current loan if rates have dropped.
- Make a larger down payment to lower the total loan cost.
- Carefully review the contract and terms before signing.
Being an informed consumer when shopping for auto loan to buy a car pays off. The chances of impulse purchases and buyer’s remorse are drastically reduced. Using even some of these strategies when buying your next car can position you to obtain a better loan, interest rate, and terms. There is nothing like leaving the lot with your car, knowing you got the best deal!
