Understand your credit situation and what you can afford
Your credit score plays a huge role in the interest rate you receive from a lender. A borrower with excellent credit can often get a rate that is 10 or more percentage points than one with poor credit.
If your credit is on the lower end of the scale, you may benefit by taking some time to improve it before taking out a loan. To boost your credit score, try to maintain a credit utilization rate — the percentage of your total credit you’re using — of 30% or less, and create a system for paying bills on time.
If you need to access your credit report, you can get it at no cost from any of the three major credit bureaus on annualcreditreport.com weekly through April 20, 2022. This report will give you information about your payment and credit history — though it won’t provide you with your credit score. Looking over your credit report can help you spot errors and find areas for improvement.
You can get your score for free on your credit card statement or online account. You can also buy it from a credit reporting agency.
Shop around with different lenders
Many lenders will show you your preapproved rates and terms online after you fill out and they generate a soft credit pull. Taking the time to get quotes from different lenders, both national and local, will give you more leverage in negotiations because you’ll understand the going rates with your particular credit score for the car you’re interested in.
Don’t just take into account the listed interest rate; calculate the total interest you’ll pay over the life of the loan based on your overall loan amount and term length.
While this may sound simple, a lower overall price will reduce the amount of interest you’ll pay on the loan.
You can reduce the sales price by declining add-ons like seat warmers and rear seat entertainment systems. You may also get a lower interest rate on a new car than on a used car, as used cars often have more mileage, expired warranties, and increased wear and tear. Lenders bake the increased risk of mechanical breakdown into the interest rate.
Add a cosigner
If your credit isn’t in the best of shape, you may be able to improve your rate by having someone with a good credit history cosign your loan. When you enlist a cosigner, they essentially let you “borrow” their credit score to help you get approved for a loan or to get a lower rate.
However, your cosigner will be responsible for your debt if you default on your loan, and their credit score will be negatively impacted if you can’t keep up with your payments.
Make a bigger down payment
While forking over all the cash for a new or used car usually isn’t feasible, it’s in your best interest to make as big of a down payment as you can afford. The larger your down payment, the less risk you pose to the lender, and the lower an interest rate they’re likely to offer you. You’ll also pay less in total interest because the overall amount you need to borrow will be lower.
Shorten your repayment term
You should try to take on the shortest repayment term you can afford with your budget because you’ll likely receive a lower interest rate. You’ll pay less per month with a longer repayment term, which may seem appealing, but keep in mind that you’ll cough up more in total interest because you’re spreading your payments over an extended period.
The best way to get a low interest rate on an auto loan is by doing your research and understanding what terms make the most sense given your budget and credit history.