How To Get A Lower Interest Rate On A Car Loan

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Taking out an auto loan to buy a new car could add hundreds of dollars to your monthly expenses. Some aspiring car owners look for more affordable new cars and shop around for used vehicles to save money, but you can also trim your monthly payment with a lower interest rate. The rate on your loan is a significant factor that impacts your monthly payment. Knowing how interest rates work and strategies for reducing them can help you save thousands of dollars on your ride.

Factors that influence your car loan interest rate 

Lenders look at several factors before assigning an interest rate for your auto loan. Most of these factors are within your control, and you can actively work on them to secure more favorable loan terms.

Credit score 

Your credit score is a three-digit number from 300 to 850 that tells lenders how effectively you pay off debt. A higher credit score will help lenders feel more confident in giving you a loan and result in a lower interest rate. You can help build your credit score with several strategies, but paying bills on time and reducing your debt balance are the most effective. Those two actions influence 65% of your FICO credit score.

Broader economic factors

This is the only factor you do not have any control over. If the Federal Reserve raises interest rates, banks will follow suit and raise the interest rates on their loans. Borrowers who take out variable-rate loans have to continue paying attention to broader economic factors because they will affect their interest rates. If you take out a fixed-rate loan, broader economic factors will not have an additional impact on your loan’s rate. But if you do not yet have an auto loan, economic factors will partially determine the interest rate you receive.

Debt-to-income ratio

Lenders look at your debt-to-income ratio to assess whether you have enough money left after expenses to cover the additional debt. If someone earns $5,000 per month but pays $4,000 per month in debt, that doesn’t provide a satisfactory margin of safety. 

Exact debt-to-income requirements will vary depending on the lender you are working with. Some may impose more rigid requirements while others may be more lenient. Even if you fulfill the requirement, you should still work on lowering your debt-to-income ratio. A lower ratio could make your loan application more enticing and help prompt a lower interest rate.

Down payment

A down payment can help reduce a lender’s risk and could lower the interest rate on your loan. Some lenders have minimum down payment requirements, but it’s often a good idea to put money down even if your lender doesn’t require it. 

Tips for getting a lower interest rate on a car loan

These strategies for improving your interest rate on a car loan could also help with interest rates on other loans like mortgages and personal loans.

Know your credit score

Lenders typically assess your credit score before giving out loans and have minimum requirements. Knowing your score and looking at it often can save you time and help you avoid lenders with high minimums that exceed your score. 

Shop around for the best rates

Don’t settle with the first loan offer you get. Aspiring car owners can save a bundle on interest by reaching out to multiple lenders. This outreach may result in multiple loan offers, and you can see which rates and terms are the most favorable.

Consider a shorter loan term

Shorter loan terms usually come with lower interest rates because the lender receives their money sooner. Shortening the loan also gets you out of debt sooner, so you have more room in your budget for other expenses.

Improve your debt-to-income ratio

Most lenders have a debt-to-income ratio limit, and a lower ratio can help put you in a better position to score a lower interest rate. You only have two ways to lower your debt-to-income ratio. Borrowers can increase their monthly income or reduce their monthly debt obligations and  minimize your debt-to-income ratio.

Consider a co-signer

Having a co-signer on board for your auto loan can improve your chances of getting approved and receiving a lower interest rate. While the co-signer takes on more risk, the co-signer’s high credit score can reduce the interest rate on your loan. You will likely have to reach out to friends and family to find someone who is willing to co-sign your auto loan.

Negotiate with the dealer

If you are financing through the dealership, don’t be afraid to try and negotiate with your dealer to potentially lower your interest rate.. Asking the dealer to lower the rate and mentioning you can go somewhere else to get a lower rate may tip their hand. You should also highlight how your income is enough to cover the loan payments and that you have great credit – so long as that applies to your situation.

Refinance your car loan

Some people come to terms with a high interest rate because it may be the only path to owning a car. But your credit score and finances can strengthen as you make the monthly loan payments. A higher income and credit score may help you qualify for a lower interest rate if you refinance your existing auto loan. You can also change the loan’s duration. A shorter loan term results in quicker repayment, while extending the loan minimizes the monthly payments.

How to renegotiate a car loan interest rate

Auto lenders want you to work with them and repay the loan each month. These companies assign interest rates based on the perceived risk. If you can convince a lender they have made an incorrect assessment of your risk level, you may get a lower rate. Here are some tips for renegotiating a car interest loan:

  • Mention your strong credit history or recent progress you have made to improve your score.
  • Talk about any career growth or side hustles to demonstrate potential income growth.
  • Share any experience you have with making on-time payments on other debt.
  • Look at the competition so you know whether your lender is offering a fair deal.
  • Consider walking away if the terms are insufficient.

Get the best terms for your auto loan

An auto loan makes car ownership more accessible, but a high interest rate can leave less room in your monthly budget for other expenses. Improving your finances, reaching out to several lenders and negotiating with lenders can help you secure a lower interest rate on your auto loan.


How can you improve your chances of getting a lower interest rate?

Borrowers can help improve their chances of getting a lower interest rate by improving their credit score and reducing their debt-to-income ratio.

Can you negotiate the interest rate on your car loan?

Yes, you can negotiate the interest rate on your car loan. You should demonstrate your ability to repay debt on time and reach out to several dealers to see the best interest rates available.

 Does the loan term affect the interest rate?

Yes, the loan term could impact the interest rate. Shorter loan terms often come with lower interest rates compared to longer terms. While longer loan terms may lower your monthly payments, they can lead to higher interest charges over time.

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