How To Lower Interest Rate on a Car Loan
Written by
Jacob Wade
Edited by
Melanie Grafil
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Buying a car can be expensive, but paying too much for your car loan can make it cost even more. Your interest rate on your auto loan can add to your payments.
There are ways to get lower APRs on your car loan, and those can save you a huge amount of money. Keep reading to learn 7 ways to get a lower APR on your auto loan.
Why Your Car Loan Interest Rate Matters
Getting the lowest APR on your auto loan can save you thousands of dollars over the life of the loan and give you a lower monthly payment. Interest is charged based on your total car loan amount. The interest rate impacts how much interest you pay over time.
For example, if you get an auto loan for $20,000 with an interest rate of 10%, you’ll pay $2,000 in interest that first year. If you get a 6% interest rate, you’ll only pay $1,200, saving you $800 that first year alone.
How To Lower Your Car Loan Interest Rate
There are multiple ways to get a lower interest rate on your car loan. Here are some of the top ways to lower your rate and save money.
| Strategy | Potential Impact | Best For |
|---|---|---|
| Improving credit score | Lower interest rates, better loan terms | Individuals with fair or poor credit |
| Refinancing | Reduced monthly payments, better rates | Borrowers with improved credit |
| Making a larger down payment | Lower loan amount, reduced interest paid | New car buyers with savings |
| Shortening the loan term | Lower rates but higher monthly payments | Those with stable income |
| Shopping around | Potentially finds the lowest available rate | Any borrower seeking savings |
| Using a co-signer | Access to better rates with stronger credit support | Younger buyers or those with limited credit |
| Enrolling in auto-pay | Small rate reduction, e.g., 0.25% lower | Borrowers looking for easy discounts |
Improve Your Credit Score
How do you qualify for a car loan? Your credit score can have a huge impact on your car loan rate. Your credit score is determined by major credit bureaus and is based on your payment history, debts owed, length of credit history, your credit mix and if you’ve had any recent credit inquiries.
To get the best rate on your auto loan, it’s good to work on improving your credit score before you apply. This may include:
- Paying down outstanding debts
- Catching up on late payments
- Reviewing your credit report for errors
- Working with a credit repair agency to improve your score.
Refinance Your Auto Loan
If you have an existing auto loan but feel like your rate is too high, you may be able to secure a lower rate by refinancing your auto loan. Now, this only makes sense when the cost of getting a new loan can save you money. You should be wary of extending your existing loan beyond the original loan terms.
If you can lower your rate and keep similar loan terms, however, you might save money. The best way to get a low rate on your auto loan refinance is to shop around. The best online lenders offer a wide range of loan terms and low upfront fees. You can compare rates quickly to find the one that will save the most.
Make a Larger Down Payment
If you’re in the market for a new car, you might be able to lock in a lower interest rate with a larger down payment. Putting down more money on your car loan shows the lender that you’re a reliable borrower. It also reduces your overall loan amount, which could then lower your interest rate. It’s good to talk to your lender about how the down payment can impact your loan APR.
Shorten Your Loan Term
If you are getting a new car loan, generally, the longer the loan term is, the higher the interest rate will be. Lenders offer longer loan terms to help lower your monthly payment; they may also see borrowers who opt for a longer loan term as less reliable. Rates for shorter loan terms may come with a lower rate, but can also help save money since you’re paying off the vehicle sooner.
[tippquote]
Here’s How That Looks in Real Life
A $20,000 car loan with a 10% APR for 72 months has a monthly car payment of about $352. You’ll pay $6,343 in interest over the life of the loan. If you get a 48-month loan, your lender may offer a 7% APY, and you’ll only pay $2,838 in interest over the life of the loan, saving you thousands of dollars.[/tipquote]
Shop Around for Better Rates
Don’t use dealer financing only because it’s convenient. Instead, shop around to find the best car loan rates. You can usually compare multiple online lenders quickly without hurting your credit score with a pre-qualified offer. It’s a good idea to also compare local banks and credit unions, as some offer better rates than online lenders. Once you find the best rate, you can then finalize the purchase of your vehicle.
Consider a Co-Signer
If you don’t have a great credit score or have a limited credit history, you may end up with a very high interest rate on your car loan. If you can find a trusted cosigner, having them co-sign on your auto loan may get you a much lower auto loan APR. Co-signers use their credit history and financial information to help you apply for a loan, which may qualify you for lower rates and a lower monthly payment.
Co-signers are fully responsible for the loan and will have to make payments if you can no longer. Just as you’re trusting them, they will need to trust you as well. If you default on the loan, it can hurt their credit score too.
Negotiate With Your Lender
The interest rate you are quoted may be negotiable, so always ask, “Is that the lowest rate you offer?” Dealership finance departments are usually flexible and can work with you on getting a lower interest rate. Make sure you understand all the loan terms, because there may be hidden fees to make up for the lower rate. You can also negotiate with the bank or credit union to see if they have any promotions available or if you qualify for a rate discount.
Set Up Automatic Payments
Many lenders offer a rate discount when you set up autopay on your account. The discount is usually around 0.25%, but this can save you money automatically. Ask your lender if there are any auto-pay discounts available and sign up to get yours.
Common Mistakes That Keep Your Rate High
Avoiding these pitfalls can help you secure a lower interest rate–and save hundreds or even thousands over the life of your loan:
- Only accepting dealer financing: Dealerships often mark up interest rates for profit. Always compare offers from banks, credit unions, and online lenders before signing anything.
- Rolling negative equity into a new loan: If you owe more than your car is worth, carrying that balance into a new loan increases your risk — and your rate.
- Choosing a long loan term: A 72- or 84-month loan might offer lower monthly payments, but lenders often charge higher interest rates for longer terms.
- Not checking your credit beforehand: Applying for a loan without reviewing your credit report can lead to surprises and higher rates. Fixing errors and boosting your score first can pay off.
- Skipping the preapproval process: Preapproval gives you leverage when negotiating and shows lenders you’re a serious borrower.
Avoiding these common missteps can make a big difference in what you pay — and how fast you pay off your car.
FAQs on How To Lower Interest Rate on a Car Loan
Here are the answers to some of the most frequently asked questions about lowering your auto loan interest rate.- Can you negotiate interest rates on car loans?
- Yes, most lenders allow you to negotiate your rate to an extent, but they may require a larger down payment. Lenders may also offer discounts for things like enrolling in auto-pay or signing up for a promotion.
- How long should I wait before refinancing my car loan?
- There's no set rule for refinancing your car loan, though you'll usually want to make sure your credit score has improved and that overall national interest rates have dropped. Don't refinance if the cost exceeds the interest savings over the life of your loan.
- Does refinancing hurt my credit score?
- Refinancing can hurt your score due to a hard inquiry on your credit report. If you don't borrow additional money and keep up on your payments, the impact should be minimal.
- What credit score do I need for a better car loan rate?
- To get a better car loan rate, you'll need to have a "Very Good" or "Excellent" credit score to get the best auto loan rates. A "Very Good" score is defined by Experian as a score between 740 and 799, and an "Excellent" score is defined by Experian as a score between 800 and 850.
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- Experian. 2024. "What Are the Different Credit Score Ranges?"
