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Higher credit scores equal the best car loan rates

5 Secrets to Getting the Best Car Loan Rates


Have you every wondered how that friend of yours manages to drive a nicer car than you? It’s not like he has a rich uncle or something. Instead, he probably knows a few secrets to getting a great used car loan. We’ll let you in on the top 5 secrets below.

Secret #1 – Check your credit report

Higher credit scores equal the best car loan rates
Do you have the credit score of Bill Gates or the Bernie Madoff? (Image by Nick Ares)

If you’ve found a great used car and worked out how much you can afford to spend each month on a car payment, don’t rush finding the best car loan to get that car. These days, it’s hard to find a low interest car loan with or without a stellar credit history.  (By the way, that friend of yours might be driving a great car because he bought it used!) The first secret to getting a better deal on a used car loan is to check your credit history.

By Federal law, you can get a free copy of your credit report every year. Just go to the official site, to start the process. If you find errors in your credit history, report them back to the major credit bureaus. If they can’t prove that the information, they have to remove it from your report, so you really have nothing to lose.  You can also see open lines of credit you might want to close (such as an unused department store charge card) to improve your debt to income ratio.

Credit reporting bureaus keep tabs on your credit balances and history of paying bills, rent or mortgages. They track whether you pay on time and if you have any outstanding loans and any debts you have already paid off. They also produce your  FICO® score, which lenders use to evaluate your credit worthiness. Your credit score is not free, but you can pay to get copy.  Your FICO  can range between 300 and 850. A score in the 700s is considered good. Few of us have a perfect score, but if you are curious about yours, go to, a government-approved source. Beware of ads promoting FICO score products because you might pay for more than you need.

Secret #2 – Shop around

Are you taking the Goldilocks approach to loan shopping? (Image by anasararojas)

If you get prequalified for a loan before visiting the dealership, you’ll have more power to pass on a loan offer that doesn’t suit you or to negotiate a better deal.

Don’t make the mistake of accepting the first loan you are offered. See what your own bank or credit union can offer you. Consider other lenders too. It’s simple enough to go on different bank or credit union websites to learn more about their loan offerings. Websites like Lending Tree let you e-mail multiple lenders asking them to contact you with loan offers. Lenders want your business, so play one off the other in negotiating the best deal.

While you may find zero interest and low interest loans from dealers on new car purchases, these deals are incentives offered by the finance arms of the automakers. You won’t find them for used car loans. In fact, the dealership will typically mark up a used car loan since they are acting as a middle man for a third party lender.

If if you have some dings on your credit history, you don’t be afraid to ask lenders if they can give you a better rate.

Secret #3 – Don’t over apply

Window for applications
Grab your window of opportunity to find new wheels (Image by Marjan Lazarevski)

Every time you make a loan application it’s noted on your credit record. Too many applications  can impact your credit score and make you less attractive as a borrower.  It may appear to lenders that you are trying to take on extra debt or are having trouble securing credit.

The secret is to be selective about where you apply, only applying for loans where you meet the borrowing criteria of the lender. Second, make all your applications in a short time period (less than two weeks). A few credit inquiries clustered together makes it more obvious that you are merely shopping around for just one loan.

Secret #4 – The term of the loan matters

For once it pays to think short-term (image by Nick)

Don’t fall into the trap of focusing on a car payment amount. Instead, think about the total amount you need to pay for the car, then calculate how both the interest rate on a loan and the term of the loan in months, impact a monthly payment amount.

$10,000 Loan 5% interest 8% interest Rate
Monthly Payment 36 Months $300 per month $313 per month
Total paid over 36 Months $10,800 $11,268
Monthly Payment 48 Months $230 per month $244 per month
Total paid over 48 Months $11,040 $11,712

Longer loans typically have a higher interest rate. So, the longer the time period of your loan, the more expensive the money is to borrow. If you can afford to pay a little more each month, go for a shorter loan period. Putting more in for your down payment can also save you substantially in the long run because you are financing less money, and it also brings down your monthly payment amount.

Read the fine print of your loan terms, including what might happen if you are late on a payment.

Secret #5 – Seek alternatives if needed

A little cunning puts you above the pack (Image by Tambako)

We mentioned credit unions and banks. Other sources you might consider approaching for a loan include your employer, associations to which you or family members belong, or (gulp)…your parents.

If it turns out you can’t get a conventional loan, consider buying from a “buy here, pay here” car dealer. These dealers are a one-stop shop for buying and financing used cars. Be advised though, the rates they charge may be higher than a bank or a franchise dealer.

Once your financing is squared away, just make sure to check out any used car before you buy. Take the car for a thorough test drive, get a CARFAX Vehicle History Report and have a mechanic inspect it. It’ll help you avoid taking out a loan on a car with hidden problems like reported damage or accidents, branded titles like salvage and flood, or an odometer rollback.

Here’s a video from CARFAX on how to get a great used car loan. Happy loan shopping!

Have you found a great auto loan rates? Let us know how in the comments!

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