How to get the best auto loan rate

Man smiles after finding the Best Ways to Get a Low Interest Auto Loan
March 18, 2022 | Jamie Smith

If you're in the market for a car, you'll want to get the best deal on an auto loan. Acquiring a favorable interest rate sounds simple, but might take more work in practice. Depending on the driver and their credit, options will vary. To help people in different credit situations, we'll go through six strategies for getting the best interest rate on your vehicle loan. We'll also help clarify a few key points about credit scores when shopping for a car.

6 best ways to get a low-interest auto loan

The more angles you use to try and get a lower interest auto loan, the better. If you know you will need to get another car soon, focus on one or two items below that are the biggest sore spots.

Learn your credit score

Your credit score reflects your history of borrowing. The better the score, the lower the interest rate lenders will generally offer. Car dealerships regularly advertise low financing rates (APR) on new cars: 2.9%, 1.9%, and in some cases even 0%. However, these prices are limited to car buyers with the highest credit scores, such as a FICO credit score of 750 or above.

Dealers and banks will generally still provide automotive loans if you have a poor credit score because they make more from higher interest. If you want the best deal possible, check your credit score before making a purchase. The sooner you see that it could be better, the more time you have to fix it.

Get preapproved

If you have an excellent credit score, you can expect to receive the best financing rates. For drivers with a more complicated credit situation, some dealers offer preapproval. During a preapproval, the lender evaluates your credit and financial information and tells you the amount they are willing tolend. This should give you a better sense of what you can afford and relieve some of the stress of not knowing if you'll get approved for the car you want.

Get a bigger down payment

We'd all just pay fully in cash if we could, but life is rarely that simple. Nearly every financed auto purchase requires a down payment, however, and the bigger the better. The more of the total cost of the car you get out of the way through a down payment, the less risk you pose to the lender. In exchange, they might be able to offer a lower interest rate. A lower interest rate and more of it paid at once results in money saved on two fronts.

Keep your loan term as brief as possible

The less time you spend paying back a loan, the more you save on interest. Lenders often give lower interest rates on loans with shorter terms, knowing that there’s less time for something to go wrong, and the chance of you defaulting is lower. Of course, shorter terms mean the monthly payments will be higher, so make sure it's still advantageous on your part.

Include a co-signer

If you want further negotiating power, consider requesting a trustworthy co-signer with good credit to apply for the loan with you. Your co-signer promises to make loan payments if you are unable to, thus lowering the lender's risk. Just bear in mind that if someone co-signs with you, the loan will appear on their credit report as well, and late payments will harm their credit history as well as yours.

Shop around

Some car dealers will lure you in on the promise of a fantastic vehicle, maybe a brand-new luxury car, for a surprisingly low monthly payment. Try to base your budget on the cost of the vehicle as a whole. Even for the same model, you can reduce the price by selecting a less costly trim level or declining add-ons.

Pick only as much car as you need. However, the same premise of shopping around also applies to loans and their terms. Don't take the first deal that feels good enough. A few more days or weeks could help you find an even better offer, whether through another dealer or even an online credit union.

What credit loan requirements are needed for an auto loan?

No one wants to find out their auto loan was denied due to a low credit score. So, what precisely is a good credit score, or at least good enough? Unfortunately, that is a question the individual lenders will have to answer for you. If you just want to avoid getting rejected for a low credit score, there is no universal minimum score to buy a car. Having a low score makes lenders less generous, though, and increases their chance of turning you down.

Borrowers with credit scores above 700 will generally be in a strong position to get a good vehicle loan. If your credit score is greater than 600 but less than 750, you are in the majority. The average credit score in the United States is 657, so adjust your expectations depending on how far up or down your score deviates from that.

What FICO score is needed for an auto loan?

FICO is the name of Fair, Isaac, and Company, a corporation that produces credit ratings. They are one brand of credit score calculators, with each utilizing very different methods to calculate your credit history. No specific FICO score is required for an auto loan. Almost anyone can get financed, but the terms will vary with the quality of the borrower's score.

It can be difficult to say what FICO score is best for an above-average auto loan. Someone could have a high FICO score, but a lower score according to other calculation models.

Car lenders commonly check for a specific FICO score type in credit reports: The FICO Auto Score. The adjusted score gives car lenders more realistic odds of your ability to make regular loan payments. The score also has a range of 250 to 900 points, unlike the usual FICO score, ranging from 300 to 850.

There are different versions of the FICO Auto Score, such as FICO 2, 4, and 5. Most car lenders care about FICO Auto Score 8. FICO Auto Score 9 is the latest version, utilized by all three major credit bureaus, so some lenders might emphasize that instead. For instance, FICO 9 scores better for individuals with medical collections and people who use less credit.

When shopping for the best auto loan rate, think less about how to force the best loan rates possible and more about how to get a personalized car loan. You don't need to transform your life and raise your credit by hundreds of points before you can get a car with sensible financing. Shop around, know a few different credit score formulas going in, and you should be able to leverage a lower APR.

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