Finding a cheap car loan depends on things like your credit score, the type of car you’re buying, and where you’re borrowing from. Finding the best place to borrow means multiple apps and more research before you shop. But getting pre-approved gives you more bargaining power at the dealership — and it could save you thousands of dollars over the life of your loan.
4 steps to get a cheap car loan
Your budget, credit score, and ideal loan term will all play a part in finding a good loan. These steps will guide you to an affordable and hopefully inexpensive lender.
1. Know your budget
Experts recommend paying no more than 10% of your income on your monthly car loan payment. Ideally, you should walk into a showroom with an exact idea of what you can afford, including the additional costs of owning a car.
Have a clear vision of the type of car you want to ensure you don’t overspend or get pushed into a vehicle that doesn’t suit your lifestyle.
Be sure to stay within your budget while finding a car that meets your needs. Research cars and prices on sites like Edmunds and Kelley Blue Book to get accurate car price and reliability estimates. Interest rates on new cars are generally lower than those on used vehicles, but these used vehicles generally cost less overall.
2. Check your credit report
Your credit score is a major factor in how lenders perceive your ability to repay a loan. When it comes to auto loans, the higher your credit score, the lower your interest rate will be. That means cheap auto loans start with having good credit. You can pull your credit score and history from Equifax, Experian, and TransUnion or for free from AnnualCreditReport.com.
It is in your interest to try to get your credit score in the best possible condition before applying for a loan. Some ways to improve your credit score include paying off all outstanding debt, seeking a credit utilization rate of 30% or less, seeking debt consolidation, and not defaulting. future payments.
3. Prequalify with multiple lenders
Although most lenders use the same factors to determine your interest rate, they apply these factors differently.
The best way to find the cheapest deal based on your credit is to prequalify with multiple lenders. Gather information from a few different banks, credit unions, or traditional lenders, then compare the interest rates they offer.
Shopping around will give you an idea of what’s out there. And once you have an idea of what you’re entitled to, you’ll have a better idea of what your monthly payment will look like. Additionally, if you want to consider dealer financing, you can negotiate with a backup plan already in place.
4. Do the math
While a low annual percentage rate (APR) is attractive, it’s not the only number you should worry about. The trade-in value of your old car, your down payment, and the term of your loan all go into the total cost of your new car.
Use an auto finance calculator to help you determine the total amount of interest you’ll pay and your monthly payment. It’s an extremely useful tool, especially once you’ve prequalified with several lenders to see what rates you can expect.
Most car loans are available for 24 to 84 months. And while a longer term means a lower monthly payment, it costs more overall. Choose a loan with the shortest term you can reasonably afford to lower the total cost.
Car loans are one of the biggest expenses for most people. It is important to plan ahead to find the cheapest car loan possible. Research current car loan rates before signing on for a new set of wheels. This will be the biggest factor in how much you pay, so keep your budget in mind when applying to multiple lenders.