7 steps to get the best auto loan rates

Negotiating a great sale price is just half the battle when shopping for a car. You need an auto loan with competitive terms to make it a great deal. Loans vary by lender, the borrower’s credit and regional factors. Shopping around with at least three lenders and getting prequalified is the best way to get a car loan with favorable terms, potentially saving you thousands in interest.

To get the best interest rate on your car loan, compare auto loans and be mindful of the interest rates, terms and fees quoted by each lender. To ensure better approval odds, get your credit score in the good to excellent range — typically 670 or higher — before getting a car loan. But if that’s not practical, you can try other strategies.

7 steps to get the best auto loan rates

Do not wait until you arrive at the dealership to secure financing. You may struggle to negotiate favorable terms with the dealer if you don’t already have an offer for a loan.

Although many dealerships shop your information around on your behalf, you will be limited to offers from lenders in their network. That means the terms you receive may not be the best available. Shopping around and getting your finances in order before you apply for an auto loan can help position you for a great deal.

1. Determine your budget

Before applying for a loan, you must determine what you can afford.

• Review your current finances: Lenders consider your debt-to-income (DTI) ratio, income and credit score when determining whether you qualify for an auto loan.
• Consider the full cost of ownership: Aim to spend no more than 20 percent of your monthly budget on a car — factoring in gas, regular maintenance and car insurance.
• Research the market: New and used cars have seen large price increases over the last several years. Compare dealerships in your area to online options to see how much you will need to borrow.
• Down payment: A large down payment will mean borrowing less — and less money borrowed means a lower monthly payment.
• Trade-in value: Shop your trade-in with multiple dealers to get the best price and increase your total down payment.

Bankrate tip

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.

2. Check your credit

Once you have a firm grasp on your budget, it’s best to consider how your credit score will play into the ideal monthly payment you calculated. Your credit score is one of the most significant factors determining your annual percentage rate (APR). The higher your credit score, the lower your rate.

Source: Experian State of the Automotive Finance Market Q3 2024

You can check your credit score online, and your bank or credit card issuer may provide you with a free update every month. If you’d like a more detailed view of your credit health, you can access your credit reports from each of the three main credit bureaus (TransUnion, Experian and Equifax) at AnnualCreditReport.com.

Minimum credit scores vary by lender, but you’ll typically need a score in the low- to mid-500s to qualify for a car loan and above 700 to receive the best car loan rates. If you have a low credit score and get approved for a car loan, you could pay a fortune in interest.

If your credit score needs work and you can wait to purchase a car, take time to improve your credit score before applying for your loan. Pay down existing debt, make timely credit card payments and don’t submit any other credit applications for home mortgages, lines of credit or credit cards.

3. Do your research

Online research is key when deciding which auto loan is right for you. Check out Bankrate’s auto lender reviews along the Better Business Bureau to narrow your list of potential lenders.

There are multiple types of lenders, including traditional banks, credit unions and online lenders. You can also get a loan through the dealership, which will match you with partner lenders. When deciding which route best suits you, consider your preferred customer experience.

• Dealerships: Dealership financing offers convenience. You can pick your car and finalize your loan in a single visit. You may also qualify for promotional APR deals through a captive lender. But avoid buy-here, pay-here dealers unless you have no other option.
• Banks: Banks tend to offer great interest rates and large loan amounts. However, their qualification requirements are typically the strictest of any lender type — if you don’t have good credit, you may not qualify.
• Credit unions: Not only do credit union car loans tend to offer lower rates than banks, they also have a reputation for friendly customer service. But you’ll need to be a member to benefit. Membership may require an application and deposit.
• Online lenders: Online lenders often cater to bad-credit buyers, though they’re worth considering even if you have healthy credit. Some sites, like Credit Direct, work as marketplaces, allowing you to receive and compare multiple offers at once. However, you’ll have to navigate the process without in-person support.

Bankrate tip

If you don’t have time to improve your credit score before applying, consider starting your search with bad credit auto loans.

4. Apply for preapproval and shop for your car

Many lenders offer auto loan preapproval so you can lock in your rate before you shop for your car. Preapproval gives you a set period, usually 30 days, to compare vehicles. It is an essential component of car-buying if you want to negotiate effectively at the dealership.

Overall, getting preapproved for an auto loan is similar to applying for any loan or credit card. To simplify the preapproval process, you should have common documents ready to submit. Proof of income, employment and insurance are standard. Your lender may also want to see other information.

5. Compare car loan quotes

Once you’ve completed your research and have a shortlist of at least three preferred lenders, compare interest rates. The best way to do this is to get quotes from a few companies since the lowest rates advertised on their websites won’t necessarily be the APR you’ll receive. Refer to the preapprovals you got in the last step if they’re still valid.

Otherwise, resubmit your information for updated quotes.

Aside from the APR, look at:

• The loan term: A longer loan term means smaller payments, but it also increases the total interest paid on the loan. You may be better off sticking to a 48-month loan with bigger payments to own your car outright sooner.
• Vehicle restrictions: Some loans may not allow you to buy an older car or purchase certain models. Make sure the loans you consider don’t prohibit you from buying the car you want.
• Speed of funding: Some loans fund quickly, while others may have a waiting period. If you urgently need a car, this is an important consideration.
• Lending fees: You’ll also find that some lenders assess origination and prepayment fees. Origination fees cover the costs associated with processing the loan application, and prepayment fees are charged by the lender if you pay the loan off early. Try to avoid lenders that charge excessive fees to keep your borrowing costs low.

6. Read the fine print

After getting loan quotes, look through the fine print. This binding agreement will follow you until you pay it off, so you need to know what you’re agreeing to.

The Truth in Lending Act (TILA) requires lenders to disclose the cost of borrowing money, the interest rates and fees upfront in a manner that’s easy to understand. This protects borrowers from harmful lending practices. Steer clear from lenders who try to hide or gloss over this information.

Pay close attention to the mandatory binding arbitration, prepayment penalties, loan processing costs and other fees the lender may charge. Binding arbitration removes your ability to sue the lender if something goes wrong, and prepayment penalties may be assessed if you pay off the loan early.

7. Finalize your auto loan

Confirm the terms with your lender once you’ve found the right auto loan. You must send in any required paperwork, including proof of insurance, before signing.

• Sign the loan contract: If you agree to the terms, review and sign the loan contract. If you have a co-borrower or cosigner, they will also need to sign the contract. If you have an auto loan from a dealership, the dealer will provide the lender’s contact information on the contract.
• Get the vehicle title and registration: You must have your vehicle title sent to the lender and the vehicle’s registration updated to your name. The dealership will usually take care of this. If not — or if you’re buying from a private seller — work with the seller and DMV to update the necessary documents.
• Take possession of the vehicle: After you finalize your auto loan and complete the sale, you can take possession of the vehicle. While your lender will be the lienholder, you will be the official owner in charge of maintenance costs and general upkeep.

Considerations for getting an auto loan

When the time comes to finalize your auto loan, getting the best rate isn’t the only important factor. Consider the following tips as you shop for auto loans.

Shop the total loan amount, not the monthly payment

Some lenders stretch out the repayment period on car loans and market the lower monthly payment to make the loan more enticing. But if you choose a longer repayment schedule, you could end up paying more for the car than you initially intended due to the additional interest payments you’ll make over the life of the loan.

You should only consider the monthly car payment when you privately calculate how much you can afford and want to spend on your car. Avoid discussing monthly payments with potential lenders.

Add a cosigner if needed

If you’re applying for a car loan and your income is limited or your credit score is less than ideal, it can be far more challenging to qualify for a car loan. And if you do qualify, you may not be offered the most competitive best loan terms. Using a cosigner in this situation can be a smart move.

A cosigner is someone who agrees to pay your loan if you face any financial challenges or setbacks and cannot keep up with the debt service yourself. If you find a cosigner who has a better credit score or a stronger income, they may help you qualify for the loan or even for a more favorable interest rate that will lower your monthly payments.

Getting a car loan with a cosigner will also give you the opportunity to improve your credit score. You’ll need to manage the loan responsibly, make all your payments on time and pay the loan in full as agreed.

Limit loan applications to a two-week period

Every time you apply for a loan, a hard inquiry is generated. However, both the FICO credit scoring model and VantageScore let you shop around for a car loan within a certain window and count all new applications for credit as a single inquiry.

This is called rate shopping. While it will temporarily drop your credit score by a few points, you won’t get multiple dings. However, applications submitted after this timeframe could cause a more significant drop in your credit score and make you ineligible for the best rates.

Bankrate tip

Limit your car loan application period to reduce any negative impact on your credit score.

Bottom line

The three main factors in getting the best rate for an auto loan are your credit score, finances and the lender. Find out in advance the average interest rates for your credit score and compare the rates and terms offered by several lenders before you apply.

This will put you in a good position to negotiate financing at the dealership — if that’s your choice. And if you don’t want to go with dealer financing, you can still narrow your options and select the lowest rate or best terms for your auto loan.

Frequently asked questions

Here are the answers to some commonly asked questions that could help you get the best auto loan rate.

• Can you get a 0% interest rate on a car?

  Getting approved for a 0 percent interest rate on a car loan is possible. Automakers sometimes offer these loans through their financing companies to attract well-qualified customers and boost sales. You’ll typically need an excellent credit score — usually 800 or above — to qualify. Most lenders also evaluate your employment history and debt-to-income ratio to determine if you’re a good fit for a 0 percent interest rate car loan.

• What is conditional financing?

  Conditional financing is a statement from your lender listing the conditions you must meet to receive your loan funds. If the financing is “contingent” or “conditional,” the lender can change your agreement later, leaving you with less advantageous terms.

  Never take a car from a dealer until the financing — down payment amount, interest rate, length of the loan and monthly payments — is finalized. Be aware of yo-yo scams, which involve the dealership offering you a low interest rate only to rescind their offer later and swap it out with a much higher rate. You can avoid these scams by reading the fine print, asking questions to clarify disclosures you don’t understand and walking away if the terms do not work for you.

   

• Can you negotiate auto loan rates?

  Yes. Like you negotiate vehicle prices, you can try to lower your interest rates before signing off. One of the best ways to secure a lower rate is by making a larger down payment or choosing a shorter term.