How to Get the Best Auto Loan Rate

1. Check Your Credit

Before you start looking at cars, it's important to get an idea of your current credit health. Start by registering with Experian to check your FICO^® Score^Θ and review your Experian credit report for free. You can also get free weekly reports from all three credit bureaus (Experian, TransUnion and Equifax) at AnnualCreditReport.com.

These resources can help you gauge how well your credit history holds up, and also pinpoint areas that you can address to improve your credit score. Your credit profile will also tell you what you have to work with.

For example, if your credit score is 670 or above, it's considered good and can help you qualify for a good interest rate. However, if you want access to the best auto loan rates, your best bet is to have a very good or exceptional score, which translates to a 740 or higher.

Learn more: What Are the Different Credit Score Ranges?

2. Take Steps to Improve Your Credit Score

As you review your credit reports, the information you find will inform you of the different ways you can improve your credit. In general, though, here are some best practices that can help you decide what to do:

• Make on-time payments. Pay all of your bills on time and get caught up on past-due payments. Your debt payment history is the most important factor in your credit score and late payments can seriously hurt your score.
• Pay off any collection accounts. Certain newer credit scoring models ignore paid-off collection accounts, so deleting those debts could help boost your scores.
• Reduce credit card debt. Paying down your credit card balances can reduce your credit utilization rate and possibly provide a quick score improvement.
• Only apply for credit if you need it. Limit new applications for other credit accounts.
• Review your credit report. If you find inaccurate information, you have the right to file a dispute with the credit bureaus.

Note that there are some credit report items you may not be able to fix. For example, missed payments remain on your credit report for seven years.

If you have some past items that you can't address, focus on what you can control before you apply for a car loan. As your credit improves over time, you can refinance the auto loan at a later date.

Learn more: Credit Score Basics: Everything You Need to Know

3. Compare Lenders

It's common for car buyers to let dealers arrange their financing, which involves submitting your credit application to multiple lenders. But that might not help you get the best rate available. In fact, the rate may be slightly higher to compensate the dealer for taking care of the financing for you.

Instead of waiting until you get to the dealership, consider getting preapproved with a handful of lenders on your own so you can properly compare the terms, including:

• Annual percentage rates (APRs)
• Loan amounts
• Repayment terms
• Monthly payments
• Fees and penalties

If you complete your car-shopping process within 45 days, FICO's newest credit scoring models will combine all of those inquiries into one for credit scoring purposes.

As you compare interest rates, repayment terms and other features, you'll be able to narrow down your list of options to the best offer available.

Learn more: How to Get the Best Car Loan

4. Put More Money Down

Lenders consider a variety of factors when determining auto loan rates, including how much you're borrowing. A higher loan amount means a higher monthly payment, which could increase the chances of default.

As a result, you may qualify for a better interest rate if you put more money down on the purchase. Before you drain your savings, though, think about how a larger down payment could affect you in other ways.

Example: The sales price of a vehicle you want to buy is $30,000, and you're considering a 60-month repayment term. A $10,000 down payment may get you an interest rate of 6%, giving you a monthly payment of $386.66.

But if $10,000 is all you have in your savings account, using it all for a down payment leaves you vulnerable to possible financial emergencies. If you put down $5,000 instead, the lender may offer you a 6.24% interest rate, giving you a monthly payment of $486.11. That's roughly $100 more per month, but if you can afford it, it may be worth it to maintain a financial buffer.

Tip: See how different down payment amounts impact your monthly payments with our car payment calculator.

5. Request a Shorter Repayment Term

Another factor lenders consider when determining interest rates is the length of the repayment term. Shorter repayment terms are more favorable for lenders because they reduce the risk that interest rates will increase significantly during your loan term, thereby reducing the lender's opportunity cost of lending you money.

Of course, a shorter repayment period means a higher monthly payment, so make sure you can afford it without impacting your other financial goals and obligations. If you can, it also means you'll pay less in interest.

Learn more: What's the Average Length of a Car Loan?

Frequently Asked Questions

The Bottom Line

Qualifying for the best auto loan rates can take time, especially if you've made some credit missteps in the past. But the effort is worth it when it can save you hundreds or even thousands of dollars in interest charges.

If you're thinking about buying a car soon, take the time to work through these steps to improve your odds of securing a low interest rate. If your situation is urgent, you may not have the time to do everything, but do as much as you can to maximize your savings.

Throughout the process, it's important to regularly monitor your credit to stay on top of your progress and to address potential issues before they become serious.