How Do You Get the Best Interest Rate on a Car Loan?

With uncertainty over how President Trump’s proposed tariffs will affect car prices, saving money via a low interest rate on a car loan matters more than ever. To get the best possible interest rate on a car loan, it’s important to understand two things: the current marketplace for interest rates, including different lender options and financing offers, and your personal financial situation and its limitations.

Related: How to Buy a Car, According to Cars.com Experts

What Are the Main Factors That Determine Your Interest Rate?

• Your lender. Unless you borrow money privately, you’re going to be working with a bank, credit union or an automaker’s financing arm. There are various pros and cons to each scenario.
• The vehicle you’re buying. Are you buying a new car? A used car? A very used car? New-car rates are often the lowest.
• Loan-term length. Automakers started employing a lot of 0% financing to keep cars selling after the recession, and now some are offering it on loans up to five or six years. In general, though, a longer car loan comes with a higher interest rate — even if the extra length on the loan term lowers the monthly payment.
• Your credit rating. Borrowers with better credit get lower rates. According to J.D. Power, 0% financing is typically only available for shoppers with the strongest credit scores and acceptable credit histories, so not everyone qualifies.

Who Are Car Loan Lenders?

Car buyers borrow money from three primary lending sources: banks, credit unions and automakers. Loans from any of these sources may come through the dealer, who often serves as the middleman and takes a cut in the process. Getting an auto loan through a car dealer is not, however, automatically more expensive. In fact, dealers provide the only way to get specialized low rates, including 0% financing, from automakers.

Car dealers borrow money at wholesale interest rates, which they mark up and pass on to you. Because the dealer’s rate is lower, the rate you get may be no higher than one you arranged yourself. Still, the only way to make sure of this is to know what your best rate is before you get to the dealership.

Are You Buying New or Used?

In general, loan rates for a new vehicle are better than those for a used car. Usually, only new cars qualify for 0% financing, though some automakers occasionally push certified pre-owned cars with low financing offers. In general, the older the car is, the higher the interest rate is.

What’s the Best Term Length?

Sign up for the shortest term length you can afford to keep your total interest lower. The longer the term you have for a car loan, the more you’ll pay in interest. The average term for a new-car loan is currently more than 68 months, according to Experian, and this leaves consumers vulnerable to owing more on an auto loan than their car is worth, a condition that’s often referred to as being upside down or under water.

What if You’re Rejected for a Loan?

Don’t try and try again until you’ve determined why you were rejected and have taken steps to address it. Credit scores are the primary determinant of who gets approved for loans, and if you didn’t check your credit score before you applied the first time, it behooves you to do so before applying again. Many loan applications automatically trigger a credit check, each of which can knock a few points off your credit score, making what might have been a bad situation even worse.

If you’ve taken all possible steps to improve your credit score, you’re ready to do what we recommend for all car buyers: Shop around for a good interest rate before returning to a dealership. Credit unions are a great option; while they’re perceived as exclusive, their interest rates are typically lower than those from many banks, and they’re more likely to examine a subprime applicant’s circumstances and make exceptions if problematic credit history results from one-time medical expenses, unemployment or divorce.

Don’t overlook the bank where you have a savings or checking account, either. Your financial history won’t be a mystery to any potential lender, but an existing relationship can work in your favor, as it’s easier for a bank to sell services to its customers than it is to find new customers.

Finally, don’t rule out financing a vehicle at the dealership. Only a dealer can offer new-car finance rates from the automaker; those rates are sometimes the lowest available. Also, if you’ve taken our advice but had little success with other sources for an auto loan, a dealership might be more willing to make financing accommodations if you’re buying one of its cars, especially a used one. If the dealership that denied you the first time was smaller, a larger one might have more tolerance for risk or have good relationships with more lenders.

More From Cars.com:

• Buying a Used Car? Here’s What You Need to Know
• What’s the Best Time of Year to Buy a Car?
• Inside the Finance and Insurance Room
• Auto Loan Basics for First-Time Buyers
• What You Need to Get a Car Loan
• Find Your Next Car

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