How does a lender decide what interest rate to offer me on an auto loan?

Auto lenders will generally consider a number of factors when they’re determining the interest rate and loan terms to offer you. Keep in mind that they’re not required to offer you the best rates. To get the best deal, it’s important to shop around and compare offers from different lenders, including banks and credit unions.

Factors used to determine auto loan interest rates

Lenders generally use these factors to determine what interest rate they’ll offer you:

• Your credit scores and history
• Your income and debts
• Amount of the loan
• Length of time you’ll be paying back the loan, called the “loan term” or “term of the loan"
• Amount of your down payment in relation to the value of the vehicle
• Type of vehicle and whether you are purchasing a new or used vehicle

Learn how much you can afford

How to get the best interest rates

Before you begin shopping for a car or visit an auto dealer, it’s helpful to:

Check your credit

Review your credit reports before you shop for a car or apply for a loan. You can review your credit reports for free from nationwide credit reporting companies including, Experian, TransUnion, and Equifax. If you find any errors or inaccuracies dispute this information to see if it can be removed.

Get prequalified or preapproved

Second, get prequalified or preapproved for an auto loan from a bank, credit union, or other lender. Again, shopping around and comparing offers can help ensure you’re getting the best deal.

Getting quotes from multiple lenders generally won’t impact your credit score. If you have multiple lenders checking your credit, it’s a good idea to keep your shopping within 14 to 45 days. This way, these credit checks count as only one credit inquiry.

You may not get the best deal by getting financing directly through a dealer. If you go this route, they will reach out to several lenders on your behalf and offer you one of those loan offers. Dealers profit when they offer higher interest rates than they receive from the lender. You can save a lot of money by comparing loan offers and negotiating for the best interest rate available to you. Negotiating can be as simple as asking the dealer if you qualify for a loan with better terms.

See different ways to get an auto loan

You have several options to consider when buying a new car or getting an auto loan. Learn how they can affect your overall money picture.

Read more about the ways to finance your loan

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