It’s a lot more fun to shop for cars than it is to shop for car loans. If you want to get the best used car loan interest rate, you should be thinking about financing your next car long before you take your first test drive.
Beyond the price of the car, paying interest on your loan can be one of the most expensive costs of owning a vehicle. Auto loans are priced using annual percentage rates, which are easily compared between different loan offers. They’re not the only number you should look at, but they are a critical one.
About 55% of used cars purchased in the second quarter of 2019 were financed, according to credit reporting bureau Experian. The average used car auto loan reached $20,446 in the same quarter.
In this guide, we’ll tackle the following topics to help you get the best interest rate possible on your used car purchase. While many of these topics focus on used car purchases from dealerships, the principles apply to transactions with private parties as well.
Follow these steps to get the best used car interest rate:
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- Shop in the Right Places for Used Auto Loans
- Get an Auto Loan Pre-Approval
- Learn How Credit Scores Affect Auto Loan Rates
- Manage Your Loan-to-Value Ratio (LTV)
- Get the Shortest Loan You Can Afford
- Don’t Focus on the Monthly Payment
- Know How the Type of Car You Buy Changes Your Interest Rate
- Refinance a Lousy Loan to Save Money
- Learn More About Used Car Loans and Interest Rates
Many car buyers – of both used and new cars – wait until they’re in the dealership's financing office before they start thinking about how to pay for the vehicle they just agreed to buy. If you want a good interest rate, that's not a good way to get it. A better way to find low-interest used auto loans is to comparison shop at several lenders before you ever get near a dealership.
You should start your shopping at the financial institution where you have your checking account. There’s a fair chance they offer discounts or other incentives to customers who have multiple accounts or loans. There’s the additional advantage that it’s simple to make your monthly payments by transferring money from one account to another within the same financial institution.
Large National Banks: America’s largest banks have massive auto financing operations with many types of car loans and streamlined processes for both in-person and online auto loan applications. With thousands of locations across the country, access to bank branches is easy. Large banks typically have automated approval processes, however, so if you have challenged credit or need to talk to someone about your loan, they might not be the best auto financing source.
While large banks may not offer the lowest auto loan rates, they frequently offer special promotions with auto loan deals.
Some banks you might want to consider for your next auto loan include:
Community Banks: Like the big banks, community banks tend to offer many financial services and products, but their smaller size allows many of them to be more flexible and easier to communicate with than large banks.
Credit Unions: As member-owned cooperatives, credit unions typically offer lower auto loan rates than banks. Credit unions return their excess earnings to members in the form of lower loan interest rates, lower fees, or higher savings and checking interest rates, instead of as profits to bank shareholders. Credit unions range in size, from tiny institutions with just one location to massive organizations that rival the size of some national banks.
Not all consumers can join any credit union due to membership restrictions. You can find an institution you’re eligible to join by using the credit union locator from the National Credit Union Administration.
Online Lenders: Online banks and other lenders take much of the paperwork out of lending by offering easy online processes to get an auto loan. Because they don’t have expensive brick-and-mortar locations, many online lenders can offer better loan rates than financial institutions with broad branch networks.
While the streamlined processes can be great, you may or may not have the option to talk to someone in person.
Another form of online lender works with many financial institutions to get you several offers with just one application. Using these sites can be a tremendous time-saver, providing offers at lenders you might not have thought about contacting.
Finance Companies: Finance companies are like banks, but they don't have savings or checking accounts. They borrow money from banks, and then lend it out to car buyers. Most automakers have their own financing companies, which fund both market-rate loans and special financing incentives. Many have programs to finance the purchase of their brand’s certified used vehicles.
Some, more specialized, finance companies work with borrowers in specific market niches – for example, subprime borrowers with credit scores too low to be considered by traditional lenders.
Car Dealers: Many used car buyers get their financing right at the dealership where they buy the car. In most cases, the loan is from a third-party lender, such as a bank, credit union, or finance company. The dealer typically marks the auto loan up from the rate that the financial institution approves. That markup is their profit for arranging the deal.
Dealers can also do the paperwork for special car financing deals from automakers, with below-market interest rates. If you’re getting a special finance deal from an automaker, the financing comes from the manufacturer’s internal financing partner.
Some used car dealers act as both the seller and the financing company, providing the funds for your auto loan. In general, you’ll want to avoid these “Buy Here, Pay Here” dealerships, as they tend to charge the highest interest rates in the auto business. Their lending policies, practices, and auto loan rates can put consumers in debt traps that are difficult to escape from.
Though many consumers use the car dealership as a one-stop shop for their used car purchase, trade-in, and financing, you can save some serious money by breaking the transaction into separate deals. The first step is getting a pre-approved financing deal from an outside lender.
Having a pre-approved financing deal in place before you go to the dealer gives them something they have to beat if they want to earn your business. You may end up getting your auto loan through the dealer after all, but if you’re not pre-qualified for a loan amount that covers your purchase, you’ll face pressure to accept whatever loan deal they offer you.
Just as you should never shop at only one dealer when you’re looking for a used car, you should always shop at multiple lenders to find the best deal before you start your car-buying journey.
If you are declined from multiple lenders outside of the dealership, you should be wary of any dealer that promises to finance your purchase no matter what your credit looks like. You’ll likely end up with an extremely high interest rate that will cost you a lot of money before the auto loan is paid off.
The single biggest factor in whether you get approved for an auto loan, and the rate you pay, is your credit score. It's a three digit number between 300 and 850 that represents the information in your credit report. Your credit score tells lenders about your creditworthiness. If you have a low number, lenders will assume there is less chance you will pay back your car loan. If you have a high number, they'll believe there's a good chance you will make all of your monthly payments in full and on-time.
Buyers with the worst credit paid more than four times the auto loan rates of those with excellent credit during the third quarter of 2019, according to Experian. Financing deals on certified pre-owned cars are generally offered only to consumers with top-notch credit.
[You can see this month's used car loan interest rates here.]
The importance of your credit score – and how it affects the rate you pay for a pre-owned car – is one of the reasons you want to think about car financing before you choose a used car. You’ll need time to find out what your credit score is, and research what’s in the credit reports behind them. Many credit cards offer a peek at your credit score as a benefit of having their card. If yours doesn’t, there are many websites, such as CreditKarma.com, which will provide your score for free. Beware of sites that try to sell you expensive credit monitoring services in exchange for seeing your score. There are plenty of places where you can look at your score without paying for anything.
By checking your credit score early, you can work to correct any errors on your credit reports and do things to improve your score. Making on-time payments on your credit cards and other obligations is the quickest way to move your score up.
Some consumers have low credit scores simply because they don’t have much of a credit history. Credit bureau Experian is offering many consumers a path to improve their scores by including their utility and telecommunications bill payment history in the factors they consider in setting the score. You need to opt-into the program to be included. Of course, if your bill payment history isn’t very good, you don’t want to join the program. Not all lenders use the Experian credit scoring model, so using the program may not increase your odds of getting a low rate or approval.
Another factor lenders look at is the value of the vehicle you’re buying compared to the amount you’re borrowing. They call it the loan-to-value ratio, or LTV. The higher the LTV, the higher the interest rate you will likely be asked to pay. To get the best interest rate, you’ll need an LTV of 80% or less.
Often you will see ads from dealers offering to pay off your current car's financing so you can get into a newer car. What actually happens is they roll the balance of your existing loan onto the top of your new car loan. While that might sound great on the surface, it's a financially perilous way to buy a car. You will have a loan to value ratio of greater than 100%, meaning you'll pay more for financing. You’ll also be at great financial risk if your car is stolen or declared a total loss after an accident.
An LTV of greater than 100% is called having negative equity, being “underwater,” or being upside-down on your auto loan. If something awful happens to the car, the market value your auto insurance company will pay won’t cover your loan balance, but you’ll still be responsible for paying the entire loan balance off.
To get the lowest rate on your car loan, you need to get the shortest loan you can possibly afford. Stretching the length of your loan can get you a lower payment, but you’ll pay more in the long run.
Car loan annual percentage rates are set by market forces and by the amount of risk taken on by the lender. Lenders can demonstrate that the longer the loan goes on, the more likely it won’t be paid back in full. That additional risk is priced into auto financing in the form of higher car loan rates. Depending on the lender, the price increase for longer loans can be dramatic.
Not only will you be paying a higher interest rate, but you'll also be paying that rate for an extended period of time, compounding the amount of money the mistake will cost you.
Another way long-term loans increase the risk to the lender is the length of time that the vehicle’s depreciation will outpace the declining loan balance. With a longer loan, you’ll likely be underwater for much more of the loan term. That situation is risky to both you and your lender. Most lenders will cover that additional risk by charging a higher rate.
It is essential to get a car payment that fits your monthly budget, but just looking at the payment takes your attention away from the rate you’re paying, as well as the amount of time your car loan will last.
Many consumers only think about the monthly payment, and many car dealers want to keep the conversation focused on the payment during the negotiation process. While getting a low monthly payment might seem like a good idea, only considering the payment is one of the costliest auto financing and car buying errors a consumer can make.
A skilled salesperson can work a deal out to get you a great monthly payment, while still giving you a horrible deal, loaded with a high interest rate, a large loan amount, hefty fees, and expensive add-ons.
Instead of exclusively looking at the payment, you should look at the total cost of the car and its financing. To do so, multiply the car payment by the number of months in the loan term, then add the amount of your down payment and the amount of your trade-in.
Let’s look at an example. You’ve found the perfect 2015 Ford F-150 and negotiated a price of $25,000. You’ve decided to make a $2,000 down payment, have a trade-in worth $3,000, and are pre-approved for a five-year loan with a 6% interest rate. After the down payment and trade-in, your initial loan amount will be $20,000. Plugging the numbers into an auto loan calculator, you’ll see that each monthly payment will be $387. To find the total cost of the car, multiply $387 by 60 months, then add the $3,000 trade-in and the $2,000 down payment. The total works out to $28,220.
Next, let’s say the salesperson tells you that they can get you a lower payment by extending the car loan out just a bit. The new deal is a six-year car loan. Because it’s a longer term, the rate jumps to 7.5%. Magically, your payment drops to $346 per month, but are you getting a good deal? To find out, multiply the $346 by 72 months, and add the $2,000 down payment and $3,000 trade-in. The total works out to $29,912.
Focusing on the lower monthly payment would have cost you about $1,700 extra over the life of the loan. That’s not a good deal.
In general, the type of vehicle you buy will not change your used car interest rate. Used car lenders tend to focus as much on the borrower than they do on the collateral backing the loan (your car). There are a couple of exceptions to this rule, though.
Certified pre-owned vehicles (CPO cars) are treated like new cars by many lenders, dramatically reducing the cost to finance them. Though you’ll have to pay a higher price for a CPO car than an equivalent non-certified used car, some of the price difference can be made up from the cheaper financing. The bonus is that most CPO vehicles come with extended warranty coverage, which potentially reduces your cost of ownership over the life of the car.
Automakers frequently offer special financing deals on CPO cars, reducing the cost of their used car loans even further. Take a look at our used car deals page to see the best offers currently available.
If the used vehicle you’re purchasing is titled as a recreational vehicle (RV), you can expect to pay significantly higher interest rates. RVs depreciate very quickly, so they aren’t worth much as collateral to lenders. Because of this additional risk, lenders charge higher loan rates. You might unexpectedly run into this issue with vehicles such as vans that have been converted to RV use.
Most car buyers get their car loans, make their monthly payments, and never think much about how they can save more money on their financing. If you had bad credit when you first took out the car loan or just got a bad deal, you can potentially save a ton of money by refinancing your loan to one with a much lower rate.
To refinance your car loan and get a better interest rate, you simply shop for a car loan like you would if you were buying a new or used car. Many lenders – especially credit unions – have programs to refinance car loans, with streamlined processes to make getting a new loan easy and inexpensive.
On average, buyers who refinance their car loans cut their interest rate by 2.4%, according to credit reporting bureau TransUnion. That works out to an average of about $50 per month, according to their data. Lower car loan rates may also allow you to reduce the length of the financing while maintaining about the same monthly payment. Reducing the auto loan term can dramatically lower your total cost of financing.
[Learn more about refinancing a car loan.]
Refinancing a car loan only makes sense if you have a fairly high loan amount and enough time left on your loan that the reduced interest payments will offset any fees charged and the value of your time in applying for the new loan.
You’ll be in a better position to get a low interest rate on a used car loan when you understand why used car loans cost more than new car financing, know how to apply for a used car loan, and complete your purchase the right way.
Why Are Used Car Interest Rates Higher Than New Car Rates?
Visit almost any lender’s website, and you’ll see interest rates listed for new and used car purchases. The used car rates are almost always going to be higher. This comes down to risk, with the lender using the interest rate to price the level of risk they have in the vehicle loan.
The value of a used car tends to be more unpredictable than it is on a new car. Lenders need to have a good prediction of how much the car is worth throughout the length of the loan, since the car is the collateral that secures the loan. Since used car values tend to vary more than the value of new cars, lenders charge a higher average interest rate. It helps to offset the higher risk that the car’s value would not cover the balance of the loan if they repossess and sell the car.
Historic data shows used car buyers tend to have lower credit scores, on average, than new car buyers. That signals lenders that there is a higher risk of not being repaid with used auto loans. Lenders price that additional uncertainty into the rate they charge.
Automakers frequently offer lower than market rate financing deals to increase the sales of slower-moving new cars or those that have redesigned versions coming soon. Those deals aren't generally available to used car buyers unless they're looking at a certified used car, where deals occasionally can be found.
According to Experian, used car buyers at franchised and independent dealerships paid an average rate of 9.57% in the third quarter of 2019, while new car buyers paid just 5.96%.
How to Apply for a Used Car Loan
Applying for a car loan is easy, though you’ll need to have a lot of personal information on hand to complete the paperwork or online form. If you haven’t started shopping yet, make sure the loan amount you get pre-qualified for is high enough to cover whatever vehicle fits your needs and budget. It’s better to aim a little high, rather than going back to ask for more money when the car you find is more expensive than you thought it would be.
The loan application will ask for your social security number so that a credit check can be performed by the lender. You'll also be asked about your employment, monthly housing expenses, debts, and other obligations. Though the application may ask for personal information, a lender can only use legally allowable information to make a loan determination.
While it may be tempting to embellish your application or fib about little details, doing so can be a costly mistake. If you are caught in the approval process, your loan will likely be declined. If you are approved, and the lender finds out later, they can call the auto loan due immediately and request full repayment at that time.
More and more online lenders allow applicants to electronically sign, or E-sign, their loan application. Doing so can dramatically speed up the loan application process, though it’s important to remember that your E-signature carries the same weight as physically signing a document. Be sure you know what you are agreeing to before you sign or E-sign any document.
It is critical that you make all of your loan applications in a short period of time to avoid multiple dings on your credit. Each time you seek new credit, your credit score will drop a few points. Fortunately, the three credit bureaus – Experian, Equifax, and TransUnion – will see multiple inquiries for the same type of financing in a short time as only one inquiry. Most experts suggest you get all your applications filed during a two-week window.
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What to Do if You Are Declined
If a lender declines to offer you financing, they are legally required to tell you why and provide a copy of the credit report they used as a basis for any loan decision. While it can be horribly embarrassing and depressing not to get approved for financing, it is good to keep in mind that a financial professional didn't think you could repay the loan. Getting declined may have saved you from later defaulting on the auto loan, getting your car repossessed, or facing bankruptcy.
The best thing you can do is to study the reason you were declined, and work to improve your financial picture in areas that were weak. Whatever you do, don’t resort to getting financing from someone who says they’ll loan money to anyone who applies. Some lenders prey on borrowers who have bad credit by charging exorbitant auto loan rates to offset the risk of making the loan. While it might prevent you from getting the car you want, remember that the first step in getting out of a financial hole is to stop digging it deeper.
Finalize Your Used Car Purchase
Whether you purchase and finance your used car at a dealership, or get your loan from a credit union or bank and buy a car from a private-party seller, it is imperative to read every document before you sign. Pay particular attention to the price of the vehicle, the length of the auto loan, and the interest rate they are charging. Don’t sign documents with errors or blank spaces. Insist they are corrected or completed before you add your signature.
Don't ever leave a dealership until you are confident the financing deal you negotiated is approved by the lender and all of the paperwork is completed. There's a tactic employed by some unscrupulous dealers called spot financing (or “yo-yo financing”). You'll think the deal is complete, but you'll be called back to the dealer a week or so later because you'll be told that you didn't qualify for the financing you agreed to. They'll offer a new deal, often with a much higher interest rate. Many consumers won't see a choice but to accept the new agreement. If it happens to you, your best option is to contact another financial institution and get approved for a new financing deal before you go back to the dealership.
More Shopping Tools From U.S. News & World Report
No matter where you are on your used car buying odyssey, the experts at U.S. News Best Cars offer tools to get you a car that fits your needs at a price that fits your budget. It starts with our used car rankings and reviews, which are based on the consensus opinion of the country’s top automotive journalists, blended with quantifiable data on predicted reliability, safety, the cost of ownership, and several other factors.
Our used car deals page will help you identify special financing deals available on certified pre-owned cars. Our car affordability calculator can show you how much car you can afford, while our auto loan calculator will compute your monthly loan payments.
Our advice doesn’t stop when you purchase your new wheels. Our car insurance hub talks you through the coverages you need, the best insurance companies in your area, and helps find you the auto insurance discounts you deserve.