Car loan interest rates can be a source of confusion for some car shoppers and a source of frustration for others. This is partially due to the fact that the fluctuation in interest rates comes with about as much transparency as the Mississippi River. However, you have more control over your interest rate than you think. By understanding the factors that determine your rate and the steps to get it down as low as possible, you will set yourself up to dominate your auto financing and get a loan you're happy with. 

How is Your Interest Rate Determined?

car loan formula

If auto loan interest rates seem a little ambiguous, it's because there are so many factors that go into determining what rate you'll end up with. Some are obvious like your credit score, but others remain a well-kept secret. Factors such as which lender you go with, how you negotiate your loan terms and whether you buy a new or used car will all influence that final number.

Your Credit Score

Your credit rating is a large piece of the puzzle when it comes to your interest rate. Generally, the higher your credit score, the lower your interest rate will be. It's crucial to be aware of your credit score prior to shopping around for a car loan and to improve it if necessary.   

Lender Options

Possible auto financing lenders include banks, automakers, credit unions or private companies. The dealership often serves as the middleman in the process to offer you financing and then takes a cut of the deal. Not all lenders are willing to offer a loan to those with bad credit and even those with good credit can find rate fluctuations based on which lender they go with. 

Find a Great Rate on Your Car Loan

car loan terms

Your Loan Terms and Conditions

Your auto financing negotiating skills will be just as important as your car price haggling chops. The length of your car loan, your down payment, and your interest rate will all be negotiable. Usually, the longer you stretch out the loan and the less you have for the down payment, the higher your interest rate jumps. You may run into a salesperson at the dealership that will tempt you into a more expensive car by offering lower monthly payments and rolling the financing into the deal. You'll want to avoid this situation to get the best deal on both the car price and also the car loan.

New Vs. Used Cars

Financing a new car will differ from a used car in the available lenders, interest rates and loan terms. Buying a used car comes with the benefit of a lower purchase price and less depreciation, but the downside is that interest rates will usually be higher than for new. 

Finding the Lowest Rate

car buyer shaking hands with salesperson

Getting the lowest possible interest rate means significant savings over the lifetime of your loan. You'll want to be proactive about your interest rate instead of accepting the first number the finance office gives you. The following steps will set you up to walk out with a great car loan.

Understand Your Credit Score

Your credit history is dynamic and can change without you even knowing. Before getting a loan, you need to be aware of your current score and the range it puts you in. If your credit falls in the fair or poor categories, your chances of finding a reasonable car loan interest rate drop significantly. Your best course of action is to find a co-signer or hold off on the car purchase until you can improve your credit score

To begin the process of improving your score, first, check your credit report for any errors that need to be fixed and then work on paying all bills on time. If you simply don't have enough credit built up, you should use credit cards regularly and pay off the balance on time.

comparison shop car loan

Comparison Shop for the Best Deal

Just like you comparison shop for your vehicle price between dealerships and online price quotes, you need to shop around for auto financing to get the best deal. Waiting until you're buying the car at the dealership to get financing is convenient, but it may not give you the best interest rate. If you have distressed credit, you could be denied a loan entirely.

It's worth taking a few minutes to apply for pre-approval for a car loan via a bank, credit union or online financing company. You can then select the lender with the lowest interest rates and the best terms. Even if you end up going with the dealership finance office for your car loan, you can use the pre-approval rates you received to negotiate a lower rate.

Get Pre-Approved for a Car Loan

Keep Your Loan as Short as Possible

Many car shoppers fall into the trap of signing off on long-term loans up to 72 or 84 months. With new cars prices climbing rapidly, this is not a surprise, but it is cause for concern. Not only will the borrower be paying interest for substantially longer, but interest rates can also skyrocket (even double) when the 60-month time frame is surpassed.

To improve your chances for the lowest possible interest rate, you should go with the shortest loan terms that allow you to comfortably make your payments (ideally 3-4 years). The monthly payment may be higher in the short term, but saving thousands of dollars over the course of the loan makes it worthwhile.