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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 deal, though, you should be thinking about financing your next car long before you take your first test drive. The best way to get a great used car interest rate is to know your credit score, shop at several lenders, and focus on the total cost of the auto loan instead of the monthly payment. 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. Some lenders offer variable-rate financing, but with auto loan rates currently on the rise, getting fixed rate financing is best for most consumers.

About 55 percent of used cars purchased in the second quarter of 2018 were financed, according to credit reporting bureau Experian. The average amount financed reached a new high of $19,708 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.

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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 car and used purchases. The used car rates are almost always going to be higher. The answer comes down to risk, with the lender using the interest rate to price the level of risk they have in the loan.

The value of a used car tends to be more unpredictable than it is on a new car. Since car loans are backed using the vehicle itself as collateral, lenders need to have a good prediction of how much the car is worth throughout the length of the loan. Since used car values tend to vary more than the value of new cars early in their first few years of service, lenders charge a higher auto loan rate. It offsets the higher risk that the car’s value would not cover the balance of the loan if they repossess and sell the car.

Used car buyers tend to have lower credit scores 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 on used car loans.

Automakers frequently offer lower than market rate financing deals to increase the sales of slower-moving models 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 9.4 percent in the second quarter of 2018, while new car buyers paid just 5.76 percent.

Where to Shop for Used Car Loans

Many car buyers, of both used and new cars, wait until they are 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 the best way to get it. A better way to find attractive auto loan rates is to comparison shop at several lenders.

You should start your shopping at the financial institution where you have your checking account. There’s a good 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 lending operations with many loan products and streamlined processes for both in-person and online auto loan origination. With thousands of locations across the country, access to a branch 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 financing source.

While large banks typically don’t offer the lowest auto loan rates, they frequently offer special promotions with auto loan deals.

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. Instead of earning profits for shareholders, credit unions return their earnings to members in the form of lower loan interest rates, lower fees, or higher savings and checking interest rates. Credit unions range in size from tiny institutions with just one location to massive organizations that rival the size of some national banks.

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Not all consumers can join any credit union due to membership restrictions. You can find an institution 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. Of course, if you want to talk to someone in person, you likely won’t have that option.

Another form of online lender works with many financial institutions to get you several offers with just one application. U.S. News partner MyAutoLoan.com can get you up to four proposals within minutes of applying for a loan.

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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. The dealer typically marks the auto loan up from the rate that the financial institution approves, and 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. Certified pre-owned car deals require you to get your financing from the automaker’s internal financing partner.

Some used car dealers act as the financing company, providing the funds for your car 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 car business. Their lending policies, practices, and auto loan rates can put consumers in debt traps that are difficult to escape from.

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 cars.

Why is a Loan Pre-Approval Crucial?

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. Having a pre-approved financing deal in place before you go to the dealer gives them something they have to beat to earn your business. You may end up getting your auto loan through the dealer, 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.

How Credit Scores Affect Interest Rates

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 based on the information in your credit report. It 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 five times the auto loan rates of those with the best credit during the second quarter of 2018, according to Experian. Financing deals on certified pre-owned cars are generally offered only to consumers with top-notch credit.

Cost of a $16,000 Five-Year Car Loan on a Used Vehicle

Credit Score

Interest Rate

Monthly Payment

Total Cost Over 5 Years

Total Interest Over 5 Years

750+

3.56%

$291

$17,460

$1,460

700-749

3.56%

$291

$17,460

$1,460

650-699

8.02%

$325

$19,500

$3,500

450-649

10.88%

$347

$20,820

$4,820

449 or less

18.36%

$409

$24,540

$8,540

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 the used car you want. You’ll need time to find out your credit score and 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, who will provide your score for free. Beware of sites such as MyFico, however, that want 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.

Interest Rates and Loan-to-Value (LTV) Ratio

Another factor lenders look at is the value of the vehicle you are buying and the amount you are 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 percent 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 horrible way to buy a car. You will have a loan to value ratio of greater than 100 percent, meaning you'll pay more for financing and you'll be at great financial risk if your car is stolen or declared a total loss after an accident.

An LTV of greater than 100 percent 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 loan amount off.

How the Length of the Loan Affects Interest Rates

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 loans 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.

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.

Why You Should Not Focus on the Monthly Payment

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 can be an expensive way to buy a car. 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 are paying and the amount of time your car loan will last.

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 six percent 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 interest rate jumps to 7.5 percent. 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.

How the Type of Car You Buy Can Change Your Interest Rate

In general, the type of vehicle you buy will not change your used car interest rate. Lenders tend to focus more 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, reducing 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.

(Copyright Stefan Randholm / Getty Images)

If the used vehicle you are 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. Where you’re likely to run into this is with vehicles such as vans that can be used as passenger cars or converted to RV use.

How Refinancing Can Save You Money

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 got a bad deal, you can potentially save a ton of money by refinancing your loan.

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 percent, 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 lower your total cost of financing dramatically.

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 putting together the new deal.

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. The loan application will ask for your social security number so that a credit check can be performed by the lender. If you haven’t started shopping yet, make sure the loan amount you get pre-qualified for is high enough to cover whatever vehicle you choose.

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.

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 say you want to get all your applications done during a two-week window.

While it may be tempting to embellish your application or fib about specific 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.

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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 or 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.

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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 a lender that charges exorbitant auto loan rates to offset the risk of making the loan. The first step in getting out of a financial hole is to stop digging it deeper.

Finalize Your Used Car Purchase

Wherever you purchase and finance your used car, it is imperative to read every document you are asked to 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 journey, 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, and cost of ownership.

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 car loan calculator will compute your monthly loan payments.

You can quickly get up to four financing offers by applying for your car loan with our partners at MyAutoLoan.com.

Our advice doesn’t stop when you purchase your new wheels. Our car insurance hub talks you through the coverages you need and helps find you discounts on your policies.