Getting the Best Car Loan Interest Rates

6 Steps for Avoiding Bad-Loan Pitfalls

On May 8, the U S. House of Representatives followed the Senate in voting to roll back auto lending guidelines and policies from the Consumer Financial Protection Bureau, the federal agency that describes its mission as making sure that "banks, lenders, and other financial companies treat you fairly." President Donald Trump signed the bill May 21.

In the past several years, the CFPB has taken enforcement actions against several car loan providers whose alleged discretionary pricing and compensation policies resulted in minority-group buyers being charged more for their auto loans than white borrowers, even when their credit was about the same. The lenders, including Toyota Motor Credit and American Honda Finance Corp., agreed to pay more than $120 million in restitution.

Get a great interest rate on your next auto loan by preparing yourself ahead of time.

Get a great interest rate on your next auto loan by preparing yourself ahead of time.

The dismantling of the CFPB's auto loan enforcement powers has been met with mixed reactions. Many in the car business, including the National Automobile Dealers Association, consider it a win and an end to unnecessary car loan regulation. Consumer advocacy groups believe that with less oversight, minority-group shoppers will be more vulnerable than they were when the CFPB was able to bring actions against auto lenders.

What does all this mean if you think that you might be overcharged for an auto loan?

Here are six simple, effective steps to help you best prepare for getting the best auto loan rates. Follow them and the likelihood of paying more in interest than necessary drops dramatically.

This advice comes from firsthand experience: Before becoming a consumer advice editor for Edmunds, I spent more than a dozen years working in Los Angeles area car dealerships. Each year I sold millions of dollars' worth of new and used cars to customers from every economic, ethnic and religious segment that is represented in Southern California.

These shoppers were of different ages and had different levels of education and dramatically different levels of experience when it came to making a car deal. Regardless of their background, savvy shoppers who followed the tips below were the shoppers who were least likely to overpay for any aspect of a car deal, including interest charges on their car loan.

6 Things the Savviest Shoppers Do

Plan ahead: Let's say you know you'll need to buy a vehicle in the next few months and you'll need a car loan to do it. Now is the time to make sure your credit history is in order. This is particularly important if you have bad credit.

If you have a credit card that lets you check your score and review your credit report, start there. Another alternative is signing up for a free credit monitoring service. Annual Free Credit Report, Credit Karma and NerdWallet are all examples of companies that can help you see what's in your credit report without a fee. These companies also often offer credit simulators that will allow you to see how certain actions, such as increasing or decreasing a credit card balance, can change your overall credit score. Because of how credit scores are calculated, sometimes an action as minor as paying off a few hundred dollars of credit card debt can dramatically increase a credit score. The higher your score, the lower your interest rate will be. Additionally, a higher credit score will give you more freedom to select the right loan for you. More on that later.

Prepare to negotiate: In most cases, the car loan rate you're offered at a dealership is negotiable, just like a car's selling price. And shoppers who seek out the most competitive rates are less likely to get stuck with a higher than necessary interest rate, just as shoppers who do pricing research are less likely to overpay for a vehicle.

Here's a hard truth about auto financing: You may need to negotiate with your dealership to get the lowest possible interest rate on your car loan. The best rate might not be offered to you right off the bat.

To help you understand what you should expect, here is a chart that shows the average interest rates assigned to shoppers based on their credit range. The information came from Experian's State of the Automotive Finance Market report, with data from the last three months of 2017.

Your goal should be to get a rate that is equal to or lower than the rate that is listed for your score:

Average new-car loan by score Annual percentage rate (APR) Average used-car loan by score Annual percentage rate (APR)
781-850 3.17% 781-850 3.8%
661-780 4.03% 661-780 5.48%
601-660 6.79% 601-660 10.1%
501-600 10.98% 501-600 16.27%
300-500 13.76% 300-500 19.32%

Look at the entire deal: Here is a common car-buying mistake and one that gets people into trouble: focusing on car payments and ignoring other aspects of the deal. Shoppers who negotiate for a vehicle based on the monthly payments alone are often the same shoppers who end up paying higher interest rates. That's because the conversation doesn't focus on the details that actually make up the payment.

For example: I recently reviewed the sales contract of a young man who negotiated a car loan strictly based on monthly payments. The loan amount was $14,000. He knew his monthly payment was $340, but he was unaware that his rate on the loan was 18 percent. He was also surprised to learn that because of his interest rate, he was going to pay nearly $8,300 in interest charges over the life of the 66-month loan. Based on his FICO score of 640, he likely could have found a rate around 10 percent, and that would have saved him about $60 per month — $4,000 over the life of the loan. Had he focused on all aspects of the deal instead of just the payment, he could have potentially cut his interest costs in half.

The winning tactic, then, is to first nail down the selling price of the vehicle you're buying and the value of your trade-in (if you have one). After you've come to an agreement on those parts of the deal, shift gears and focus on the interest rate of the loan. Once you're clear on all those elements, it's time to talk payments. (To see the effect of different auto loan interest rates and loan terms on the amount of interest you'd pay over the life of a loan, check out the Edmunds auto loan calculator.)

Get preapproved: Consider getting preapproved for a new-car or used-car auto loan at your bank or credit union. If one of those financial institutions isn't an option, check to see if a credit card company with whom you do business offers car loans.

With an approved car loan in hand, you're not obligated to take a dealership's financing. Here's a pro tip: Don't initially tell the dealership that you have a preapproval. Go through the deal as you normally would and let the dealership make its financing offer. In some cases, the rate the dealership can provide will beat a preapproval from a bank or credit union. Choose the option that works best for you.

Shop around for your loan: This may be the most critical concept of the six. It's also the easiest to do.

According to a CPFB survey, only 50 percent of car shoppers reported that they had shopped around to find an auto loan with a better interest rate. Shopping different dealerships to find low rates isn't hard, and it can often be done with some phone calls. Another pro tip: If you're not happy with the rate being offered by the financing company of one car brand, consider shopping for a car from a different brand. That automaker and its lender may have different lending guidelines. This can be a real opportunity to save money in interest charges. The better your credit score is, the more options you'll have to select from.

If you're unhappy with the loan terms you've been assigned, you really should shop around. If you don't, you're probably leaving money on the table.

Take your time: Don't do all your car shopping in one day if you can help it. After a long day of test-driving and price negotiating, you may be worn down. Making a decision on a car deal when you're exhausted isn't a good idea. So if you're tired, go home and think the offer over. Sleep on it, if you like. The deal will almost certainly still be there in the morning, and you can make your decision when you're rested and clearheaded.