When buying a car, the goal isn't just driving it off the lot — it's also ensuring the purchase ​​doesn't derail your financial stability. That's why securing an affordable car loan is a vital step in the car-buying process. Its benefits can include lower monthly payments and less interest paid over the life of the loan.

Some critical steps for finding your cheapest car loan include improving your credit score, determining your budget and shopping around for deals.

Factors That Affect the Cost of Car Loans

When planning to finance a car, it's essential to understand the factors that significantly influence the cost of your car loan. These include your credit score, interest rate, loan term and the car you buy.

  • Credit score: Lenders use your credit score to assess the risk of lending to you. A higher credit score can indicate that you're less risky, leading to more favorable loan terms and lower interest rates. Conversely, a lower credit score may result in higher interest rates as lenders expect a greater risk of default.

  • Loan term: The length of your loan directly impacts how much you'll pay each month. Shorter loan terms often have higher monthly payments but lower total costs due to less accrued interest. Meanwhile, longer loan terms can lower your monthly payments but increase the total cost of the loan due to more interest paid over time.

  • Interest rate: The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. Lower interest rates typically mean lower total costs. Note that your credit score, loan term and the lender's current rates significantly affect your interest rate.

  • Down payment: A larger down payment generally reduces the amount you need to borrow, which can lower your monthly payments and the total interest paid over the life of the loan. It also decreases the lender's risk, potentially leading to a lower interest rate.

  • Vehicle age and type: The age and type of vehicle you're financing also impact your loan cost. Newer cars often have lower interest rates than used vehicles because they're less risky for the lender. Similarly, certain types of vehicles may have lower rates due to their higher resale value.

Consider how the above factors apply to your financial situation and the car you're looking to buy.

How To Get the Cheapest Car Loans

Getting the cheapest car loan can mean lower monthly payments and less interest paid over the life of the loan, translating into significant savings. The following steps can help you secure a car loan that aligns with your budget and financial goals.

Improve Your Credit Score

Improving your credit score is a key strategy in securing the cheapest car loan, as lenders often offer better terms and lower interest rates to borrowers with good to excellent credit. Before applying for a car loan, make sure to improve your credit score by taking these steps:

  • Dispute errors on your credit report: Check your credit report for any errors that might be hurting your score. You can get a free credit report from each of the three major credit bureaus — Experian, Equifax and TransUnion — once a year through AnnualCreditReport.com. If you find any errors, dispute them with the credit bureau.

  • Pay your bills on time: Your payment history is the most significant factor in your credit score. Making your credit card and loan payments on time is a great way to improve your credit score. Consider setting up automatic payments or reminders if you need help remembering due dates.

  • Reduce your debt: How much of your total credit you’re using, also known as your credit utilization ratio, is another major factor in your credit score. Try to keep your credit utilization below 30% by paying down your balances and avoiding unnecessary credit card spending.

  • Limit new credit applications: Each time you apply for credit, a hard inquiry is made, which can lower your credit score. Try to limit new credit applications, especially in the months leading up to your car loan application.

Improving your credit score can take time, but the benefits are worth it. A higher credit score can qualify you for the cheapest car loans, saving you money in the long run.

Determine Your Budget

As a rule of thumb, you should know how much you can afford when financing a car. You can do this by assessing your monthly income and expenses. Additionally, consider the total cost of owning a car, which includes auto insurance, maintenance, fuel and potential repair costs on top of the loan payment. These additional costs can add up, so factoring them into your budget is crucial.

Get Pre-Approved

Getting pre-approved for a car loan is a smart move when aiming for the most affordable loan. Pre-approval is when a lender reviews your financial information and determines how much you can borrow and at what interest rate. This process gives you a clear idea of what you can afford before you start shopping for a car, helping you to stay within your budget.

Getting pre-approved also gives you a significant advantage when negotiating with car dealers. With a pre-approval in hand, you essentially become a cash buyer, which can give you more bargaining power. You can negotiate the price of the car rather than the monthly payment, helping you secure a better deal.

Shop Around

Every lender has different methods for evaluating your creditworthiness and determining interest rates, meaning the terms lenders offer you vary significantly. By shopping around, you can compare these offers and choose the one that best fits your financial situation.

Online tools and calculators can be particularly helpful in this process. They allow you to input your loan amount, term and credit score to see estimated interest rates from various lenders. These tools can give you a sense of what to expect and help you identify lenders that offer the most favorable terms.

It’s worth noting, however, that when lenders check your credit to provide an offer, it can temporarily lower your credit score. To minimize the impact on your score, try to do all your shopping within a 14-day period. Most credit scoring models count multiple inquiries for the same type of credit as a single inquiry if they occur within this window.

Buy a Cheaper Car

The price of the car you buy directly affects the size of the loan you'll need. A less expensive vehicle requires a smaller loan, which can lead to lower monthly payments and less interest paid over the life of the loan. This can make the loan more manageable and less of a burden on your monthly budget.

A cheaper car can also allow you to make a larger down payment in terms of the car's price percentage. For instance, if you have $4,000 to put down, that's 20% down on a $20,000 car but only 10% down on a $40,000 car. A larger down payment percentage can lead to more favorable loan terms, including a lower interest rate.

Choosing a cheaper car can also reduce other costs associated with car ownership. Less expensive cars often cost less to insure, maintain and repair, which can lead to additional savings over time.

Where To Get a Car Loan

When you're in the market for a new car, understanding where to secure an affordable car loan is just as important as choosing the right vehicle. To get the cheapest car loan, explore different lenders, including credit unions, online lenders and some banks.

  • Credit unions: Credit unions often offer low-interest rates on car loans because they are non-profit organizations and aim to provide value to their members. To get a loan from a credit union, you'll need to become a member, which usually involves living, working or studying in a particular area or working in a certain industry. However, some credit unions have more relaxed membership requirements.

  • Online lenders: Online lenders tend to offer competitive rates because they have lower overhead costs than traditional banks. They also often have streamlined application processes, making getting a car loan quicker and easier. However, it's important to research online lenders to ensure they are reputable before applying for a loan.

  • Banks: While banks may not always offer the lowest rates, they can be a good option for those with solid credit. If you have an existing relationship with a bank, such as a checking or savings account, you may be eligible for a discounted rate on a car loan. It's worth checking with your bank to see what they can offer.

  • Car dealerships: Dealerships often offer financing, and while it may not always be the cheapest option, they sometimes have promotional offers, such as 0% financing for a certain period. However, these offers are usually only available to buyers with excellent credit.

Think about the lenders that best suit your situation when considering your options.

Frequently Asked Questions

When looking to secure the cheapest car loan, it's common to have questions. We address some of the most frequently asked questions to help you confidently navigate the process.

Shopping around for a car loan allows you to compare offers from different lenders and choose the best one for your financial situation. Each lender has its own method for evaluating your creditworthiness and setting interest rates, so the terms they offer can vary significantly from one lender to another.

You can find cheap car loans from a variety of sources, such as credit unions, online lenders, banks and car dealerships. Each source offers different advantages and disadvantages, so exploring all your options and comparing loan terms and interest rates is important.

Yes, in many cases, you can negotiate the interest rate on your car loan. This is especially true if you've been pre-approved for a loan, as you can use your pre-approval offer as a bargaining chip. However, your ability to negotiate will depend on your credit score, the lender and the current market rates.

When getting a car loan, it's important to consider the total cost of owning a car. This process includes not only the loan payment but also maintenance and repair, auto insurance and fuel. These additional costs can add up, so it's important to factor them into your budget.

Both dealership financing and direct loans from lenders have their pros and cons. Dealership financing can be convenient and sometimes offer promotional financing, but they often receive a commission for arranging financing, leading to higher interest rates. Meanwhile, direct loans allow you to negotiate as a cash buyer and shop around for the best rates. It's important to compare offers from both sources to find the best deal for you.

About Christopher Boston

Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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