7 Ways to Pay Less Interest on a Car Loan

1. Compare Multiple Loan Offers

One of the best ways to score a lower interest rate is to compare loan offers, as rates can vary widely from one lender to the next. Dealer financing is also a convenient option, and many dealers offer competitive rates worth your consideration.

Going one step further, you can prequalify for multiple loan offers with banks or credit unions using a soft credit check that won't impact your credit score. Once you find a loan that meets your needs, you can get preapproved from the lender (which typically requires more information and a hard credit check) and receive a preapproval letter. Showing up at the dealership with a preapproval letter could give you a negotiating edge since you'll know what rate and terms you'll likely qualify for. You can leverage that offer to push the dealership to match the rate, and they may even try to beat it to win your business.

Learn more: How Long Is Auto Loan Preapproval Good For?

2. Make a Larger Down Payment

The more you borrow on your car loan, the more interest you'll have to pay. That's due to two major factors:

• You're paying interest on a larger principal loan balance over the life of the loan.
• Larger loan amounts typically come with higher interest rates to compensate for the lender's increased risk.

However, by making a sizable down payment or trading in your vehicle, you can lower the amount of your auto loan and may even qualify for a lower interest rate.

Here's a breakdown showing how a $10,000 down payment on a $30,000 vehicle could lower your interest charges compared to borrowing the full car purchase amount.

As this example illustrates, a solid down payment significantly lowers your monthly and total interest payments. In this case, it lowered the interest charges by nearly 50% compared to borrowing the full purchase price amount. Even better, you may qualify for lower interest rates on smaller loan amounts and save even more.

3. Get a Shorter-Term Loan

Along the same lines, you'll typically pay less interest over the life of a shorter-term car loan since there are fewer months for interest to accumulate. On top of that, lenders generally offer lower interest rates with shorter repayment terms because there's less likelihood a borrower will default on a 48-month loan than on a 96-month loan. If you can swing the higher monthly payment, a shorter loan term could help you snag a lower interest rate and pay less interest on your car loan.

Using the preceding example, let's look at how a shorter-term loan affects the interest charges on a car loan.

Here, we see how a 48-month term instead of a 60-month term can reduce your total interest costs, in this case by $980.60. You could save even more on interest if the shorter loan term qualifies you for a lower interest rate. However, the monthly payment is substantially higher—an important factor to weigh if you're considering this route.

4. Make Additional Payments

Making additional payments on your car loan can help you reduce your overall interest charges, but only if your lender applies the extra amount to your principal balance. Be sure to check with your lender before making extra payments to confirm how they'll be applied and if they charge prepayment penalties. You'll also pay off your car loan faster and free up money for other financial goals.

Here's how to make extra payments on your loan:

• Make use of extra income. Direct funds from a pay raise, work bonus, tax refund or any other windfall toward your auto loan.
• Pay extra each month. Add a fixed amount, like $50 or $100, to your monthly car payment. Even rounding up a $360 payment to $400 could make a difference over time. You can always increase the amount later as your financial situation improves.
• Make biweekly payments. Most auto loans calculate interest daily using simple interest, which means the interest you pay is based on your remaining principal balance. By splitting the payment into two parts and paying half of your monthly payment every other week, you'll reduce the principal faster and lower the total interest you owe. And with biweekly payments, you'll make 26 half-payments or 13 total payments each year—one more than if you made one full payment each month.
• Earn extra money. A part-time job or side hustle may boost your income enough to make extra payments on your car loan and work toward other goals like paying off debt or saving for retirement.

5. Decline Dealer Extras

Dealer add-ons, such as extended warranties, gap insurance and VIN etching, can push up your principal loan balance and, consequently, the interest that comes with it. Dealers often present these options as packages, making it easy to get more options than you need or even want.

One strategy you might employ is to decline the dealer upgrades altogether to keep your loan balance from ballooning. You can negotiate for the add-ons you want individually or purchase them from other providers to avoid rolling them into your loan and accruing interest.

For example, you can negotiate with the dealer for a better price on an extended warranty or decline it and shop different providers for a more affordable policy. Still another option is to forego the extended warranty and utilize a car repair or sinking fund instead. Take the cost of an extended warranty, divide it into monthly amounts, and set that money aside each month for maintenance and repairs.

Learn more: Hidden Costs of Getting an Auto Loan

6. Take Advantage of Special Promotions and Financing Offers

Car dealerships and manufacturers regularly run special promotions, such as clearance sales and holiday promotions. Toward the end of the year, dealerships often hold year-end savings events to help them clear out old inventory and make room for new models. If you don't need a new ride immediately, you might wait for one of these promotions to get a lower sales price on a car, which can significantly cut your interest charges.

Occasionally, car manufacturers offer 0% APR financing, also known as "same as cash" deals. With no interest charges on top of your principal balance, you can save a tidy amount on your car loan. Keep in mind, you typically must have strong credit to qualify for these deals, so check your credit score before applying for financing.

Learn more: When Is the Best Time to Buy a Car?

7. Refinance Your Loan

If you want to pay less interest on your current car loan, consider refinancing to a shorter term. Doing so would likely boost your monthly payment, but you could save on interest. Your payment may not increase much—or at all—if your credit has improved and you qualify for a lower interest rate than when you first got the loan.

Before proceeding with a refinance, take the time to do the math to see if it's worth it. Experian's car payment calculator can help you compare your current loan's monthly payments and total interest with those of a refinanced loan to see if the savings justify a higher payment.

Strengthen Your Credit for a Lower Interest Rate on Your Car Loan

Your credit score is an important factor lenders consider when calculating your interest rate. A higher credit score generally results in more favorable loan terms and vice versa. Securing a lower rate not only lowers your cost of borrowing, but it could also make it easier to manage a shorter-term loan with higher monthly payments.

It's a good idea to check your credit report and score for free before heading to the dealership to see where you stand. If your score isn't where you'd like and you're not in a rush to buy a car, take steps to improve your credit, which could help you secure a lower interest rate on your loan.