These days, a car can cost more than the downpayment on a mortgage. If you’re wondering how you can lower your car loan costs, there is a lot in your control. If you want to get a lower interest rate on a car loan, planning can help secure the best possible rates. A high credit score, low loan amount, or shorter repayment terms can all equal a lower interest rate for a car loan.
Factors that influence your car loan interest rate
Your car loan interest rate is a mathematical calculation that takes into account your credit score, debt-to-income ratio, down payment amount, and overall financial health. But there is still room for negotiation, and improving even one area can help you get a lower interest rate.
Credit score
Your credit score is a prediction of how likely you are to default on a loan. It indicates how likely you are to pay back the loan. The higher your credit score, the lower the interest rate. Generally, a score of 700-plus is considered good, although some lenders say 670 to 740 is good, 740 to 800 is very good, and 800 to 850 is excellent.
Below the good category, it can be difficult to get a car loan, or your interest rate may be significantly higher. If your credit score is very good or excellent, you have more negotiation room, and lenders will automatically offer you a lower interest rate. If you can boost your credit score before applying for a loan, do it.
Broader economic factors
Broader economic factors that can affect your car interest rate include current standard interest rates and the number of new auto loan applicants. When the economy is strong, car interest rates can be higher. If interest rates are currently high, consider waiting to purchase a car until interest rates drop.
Debt-to-income ratio
The debt-to-income ratio looks at the amount of a consumer’s total debt to their current income. A high debt-to-income ratio indicates a consumer has less disposable income and could have greater difficulty paying off an auto loan. Debt includes student loans, other auto loans, mortgages, credit card debt, and any other debt.
A debt-to-income ratio of 35% or less is considered good. With a debt-to-income ratio of up to 49%, you can usually secure an auto loan, but the interest rate may be higher. At 50% or above, you’ll have to pay higher interest rates if you’re able to secure an auto loan.
Down payment
A down payment can significantly impact the total loan amount. Generally, the smaller the loan, assuming all other factors are equal, the lower the interest rate. If a car costs $18,000 and you make a $6,000 downpayment, the loan amount will be $12,000. If you don’t put anything down, the loan will be 50% more at $18,000.
A larger down payment also means you’ll pay less in interest over the life of the loan. In the example here, the borrower who makes a $6,000 downpayment will end up paying $1,587.29 in interest on a loan with a 5% interest rate and a 60-month term. The borrower that takes a loan of the full $18,000 will pay $2,380.93 in interest on the same loan terms.
Cost of the car
A less expensive car will result in a lower loan amount and a lower interest rate. If you don’t have funds for a larger down payment, consider a less expensive car. Research older vehicles that are highly rated for reliability and are less likely to require costly repairs. You can also try to negotiate the price of the car with the seller or secure a payment plan directly with the seller.
How to lower the interest rate on your car payment
If you need to lower the interest rate on a car loan, you’ll need to focus on each of the factors that can impact interest rates, from credit score and down payment amount to shopping for lenders with more favorable terms.
Focus on improving your credit score
Improving your credit score is one of the most important steps you can take to open both short-term and long-term financial opportunities. To quickly boost your credit score, you can use a rent reporting company to get credit for on-time rental payments. You can also use Experian Boost to get utility payments reported to the three main credit bureaus.
Another way to quickly increase your credit score is to have a friend or family member with a very good or excellent credit history to add you to a credit card as an authorized user. You’ll benefit from their good credit history. Beyond that, the keys to improving your credit score are to make all payments on time and to pay off as much debt as possible.
Make a larger down payment
A larger down payment will mean a smaller total loan and can often mean lower interest rates. Not only will you end up paying less in interest, but your monthly payment on the principal will also be less. If you want better loan terms, see how much you can stretch to increase the down payment.
Shop around for lenders
Even with a lower credit score or higher loan amount, each lender has discretion over the terms offered. Compare four to five different lenders to find the one that can offer the best terms for your current financial situation. Then, ask what you’d need to do to lower the interest rate on a car loan.
Get a co-signer
If you get a co-signer that person takes responsibility for making the monthly auto loan payments if you cannot. Ideally, you don’t want the co-signer to ever pay. Their high credit score, low debt-to-income ratio, and strong financial position act as insurance to the lender that they will receive payments on time. If you get a co-signer, you may be able to qualify for a lower interest rate and pay less interest for the loan.
Opt for a shorter repayment term
Lenders generally consider a shorter repayment period to be lower risk. A borrower with a 48-month auto loan is less likely to default than a borrower with a 96-month auto loan. A shorter repayment period will mean higher monthly payments, but you’ll still pay less in interest overall. If you can do it, you’ll also own the car outright faster, which makes it a win-win solution.
Negotiate with your lender
Talk to your lender and see which solutions will make them consider a lower car loan interest rate. For example, you can suggest a higher down payment, shorter loan term, or adding a co-signer and specifically request a lower interest rate. It can’t hurt to simply ask what the best rate they can offer you is. Sometimes the question opens the door to more favorable terms.
Consider refinancing
If all else fails, you can always refinance to get a lower interest rate down the road. If your credit score improves with time, you may be able to secure a better rate by refinancing. With a refinancing option, you’ll repay your original auto loan in full and take a new loan with a lower interest rate. Keep in mind that for this option to work, you’ll need an auto loan that doesn’t have a penalty for repaying the loan sooner.
Final tips to get a lower car interest rate
In addition to considering a less expensive vehicle or a larger down payment, keep in mind that with some planning and research, you should be able to find a way to get a lower car loan interest rate. The time it takes to research options, save, and build your credit score will more than pay for itself in interest saved over the life of the loan.
FAQ
Why is my car loan interest rate so high?
Your credit score and debt-to-income ratio can make an auto loan interest rate higher. In addition, the amount financed, length of the loan, age of the vehicle, and down payment can all affect interest rates.
What is the average interest rate for a car loan for someone with bad credit?
The interest rate for an auto loan for a person with bad credit can be close to 13%, but average interest rates for borrowers with higher credit scores range from 3.84% to 10.11%.
What is a typical car loan interest rate?
Typical car loan interest rates vary widely based on the loan amount, loan terms, and the borrower’s credit score and debt-to-income ratio. Average interest rates range from 5.16% for new cars to 9.34% for used cars.
