Slash Your Car Loan Interest: Expert Tips for New and Used Car Buyers

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Last updated May 7, 2024

Navigating the world of car loans can be daunting, but understanding how interest rates work is key to making a wise investment in your new or used vehicle. By learning how to save on car loan interest, you can potentially save thousands of dollars over the life of your loan. In this guide, we’ll explore expert tips for securing the best interest rates when buying both new and used cars. Already bought your car? We’ll dive into refinancing options too.

Saving on Car Loan Interest When Buying a New Or Used Car

how to save on car loan interest

Boost Your Credit Score

Your credit score plays a major role in determining the interest rate you’ll receive on a car loan. Lenders use credit scores to assess the risk associated with lending money, and a higher score often results in lower interest rates. Before shopping for a new car, check your credit score and work on improving it. Paying off outstanding debts, making timely payments, and keeping your credit utilization low can all help boost your score.

Shop Around for Financing

Don’t limit yourself to the dealership’s financing options. Shop around for car loans from banks, credit unions, and online lenders to find the best interest rates. Get pre-approved for loans from multiple lenders and compare the terms, fees, and interest rates to secure the best deal. Don’t forget to get a free quote with CarEdge-approved credit unions. Even if you decide to finance elsewhere, you can use our low rates as leverage when negotiating.

Opt for a Shorter Loan Term

While a longer loan term may result in lower monthly payments, it also means you’ll pay more interest over the life of the loan. Opting for a shorter loan term can save you money in the long run by reducing the total interest paid. Keep in mind that this will result in higher monthly payments, so ensure it fits within your budget.

Loan AmountInterest RateLoan TermMonthly PaymentTotal Interest Paid
$25,0004%36 mo$738.01$2,568.36
$25,0004%60 mo$460.59$4,635.40

Make a Larger Down Payment

A larger down payment can help you save on interest by reducing the loan amount and demonstrating to lenders that you’re financially responsible. Aim for a down payment of at least 20% of the car’s purchase price to minimize the interest costs and potentially qualify for a lower rate.

Ask About Large Loan Discounts

A large loan discount in the auto financing world refers to a reduction in interest rates or fees offered by a lender when a borrower takes out a car loan that exceeds a certain threshold. This practice is based on the principle that larger loans usually involve more significant risks for the lender, and the reduced interest rate or fees help to incentivize borrowers to choose that particular lender for their car financing needs.

Ask About Qualifying For a Tier Bump

Tier bumps in auto loans are a practice employed by some lenders to offer a more favorable interest rate to borrowers who may be on the cusp of qualifying for a better tier or category. Essentially, the lender “bumps” the borrower up to a higher tier, which comes with a lower interest rate, despite their credit score or financial profile not quite meeting the standard criteria for that tier. This practice can be particularly beneficial for car buyers who have borderline credit scores or are working on improving their financial situation.

LTV Discounts

Loan-to-value (LTV) ratio is an essential factor that lenders consider when determining interest rates for auto loans. The LTV ratio is the amount of the loan compared to the market value of the vehicle being financed. A higher LTV ratio typically indicates a higher risk for the lender, as it means they are financing a larger percentage of the vehicle’s value. In such cases, lenders may charge a higher interest rate to compensate for the increased risk. To secure a lower interest rate on an auto loan, aim for a lower LTV ratio by making a larger down payment or opting for a vehicle with a lower price tag.

Consider Manufacturer Incentives

Automakers often offer special financing deals or cash rebates to encourage new car sales. Keep an eye out for manufacturer incentives, such as low or 0% APR financing, which can significantly reduce your overall interest costs. Be sure to read the fine print and weigh the pros and cons of these offers before deciding. To make the most of your car loan interest savings, check out our guide on the best auto loan rates and learn how to secure the most favorable financing deals.

used car interest rates

Look for Certified Pre-Owned Vehicles

Certified Pre-Owned (CPO) vehicles are a great option for used car buyers seeking lower interest rates. These vehicles undergo rigorous inspections and often come with extended warranties, making them a lower-risk option for lenders. As a result, CPO vehicles typically qualify for lower interest rates compared to non-certified used cars.

Browse certified pre-owned (CPO) car listings at CarEdge Car Search

Refinance an Existing Loan

If you already have a car loan with a high interest rate, consider refinancing to save on interest costs. Refinancing involves taking out a new loan to pay off your existing loan, ideally with a lower interest rate. This can be a smart move if your credit score has improved since you initially took out the loan or if interest rates have dropped.

Leverage Your Trade-In

When buying a used car, use your trade-in as leverage to negotiate a better interest rate. Dealerships often make more profit from used car sales, so they may be more willing to offer lower interest rates to secure the deal. Research the value of your trade-in before negotiating to maximize its impact on your loan terms. Be sure to check the Black Book valuation of your trade-in with CarEdge Insights. Finally, you have access to the same car value data that dealers use!

Check out our guide to getting more for your trade-in

Avoid Dealer Markups

Dealerships may add a markup to the interest rate they offer on car loans, pocketing the difference as profit. Be aware of this practice and ask for a direct quote from the lender to ensure you’re getting the most competitive rate possible. If you have multiple loan pre-approvals, you can use them as leverage to negotiate the best rate with the dealer.

It’s smart to understand how dealers make money before negotiating.

Pay Off the Loan Early

If your car loan allows for early repayment without penalties, consider making extra payments or paying off the loan ahead of schedule. This can save you a significant amount of money on interest charges over the life of the loan. Just be sure to double-check your loan agreement for any prepayment penalties before proceeding.

Saving On Interest Is More Important in 2024

By taking the time to research your options, improve your credit, and negotiate favorable loan terms, you can save thousands of dollars over the life of your loan. Remember, every bit of effort you put into securing a lower interest rate will pay off in the long run.

At CarEdge, we’re dedicated to helping you make the most informed decisions when purchasing a vehicle. Whether you’re looking for expert advice, comprehensive data, or personalized coaching, we’re here to help you save money and drive away with confidence. Check out our free resources, or explore our premium car buying help today and start your journey toward the best car loan interest rates available.

1 Comment

  1. J Martin

    Hello Car buying Gurus! Regarding the multiple security deposits on the lease and being able to get that back…What if you’re leasing for the incentives with the intent to buy out the vehicle at the end? For instance, I’m looking at the electric vehicle from Genesis that no longer qualifies for the federal tax credit, however, Genesis is offering $7500 in lease cash…If I make multiple security deposits to lower the money factor, can I get that back if I buy out the vehicles before or at the end of the lease???


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