Car buyers' best cost-saving move: shop for a loan first

With the cost to own a new vehicle rising, it's more important than ever to consider what you'll pay for a car loan and to shop for the best interest rate.

The average new car loan interest rate reached 5.5% in 2018, up about one percentage point from the previous year, according to Ben Bartosch, J.D. Power's manager of forecast analytics. Meanwhile, a new car purchase price is $33,000, on average, he says. That means a buyer will pay thousands of dollars in interest on a 60-month loan.

Indeed, many car owners report feeling stressed by their debt. A recent Harris Poll survey of 2,000 Americans for Fair, which provides cars each month for a flat fee, found that 47% of people who've had auto loan debt say it's taken away some of their peace of mind.

With the shift in the loan market, anyone looking to buy a car or refinance a loan needs smart strategies. Here are five things financial and automotive experts say will help you lock in financing that fits your budget.


If you don't know your credit score, you don't know what interest rate you could qualify for. Additionally, if you find a problem on your credit report, you can fix it before entering the car-buying process. And, if you already have a loan, you may be able to refinance into a lower rate and payment if your credit is stronger than when you started the loan.

Your credit score is available for free from many personal finance websites, banks and credit card issuers. And you can use to request the free credit reports you're entitled to every 12 months from the three major credit bureaus.


The loan-shopping process should start long before the car-buying process, Bartosch says. Calling around, or submitting online applications, could save you hundreds of dollars.

"Most people just think of going to the dealer to get a loan," says Sonia Steinway, president of auto loan company Outside Financial. But, "There's a whole world of options available to them." She says credit unions offer some of the lowest rates and the best customer service.

To compare loan offers, keep these terms the same:

—LOAN AMOUNT. In addition to the negotiated purchase price of the car, sales tax and fees will increase the amount you'll need to borrow.

—DOWN PAYMENT. The more you put down, the less you have to borrow, saving you money on interest — and it might help qualify you for a better rate.

—LOAN TERM. Experts recommend 60-month loans for new cars and 36 months for used vehicles.


Once you know the interest rate you qualify for, use a car loan calculator to estimate your monthly payment. Aim to spend no more than 10% of your take-home pay on your loan payment and less than 20% for total car expenses, which also includes gas, insurance, repairs and maintenance.

If you're refinancing, extending your loan term can lower your monthly payment, but you may pay more in interest overall. Use an auto loan refinance calculator to see if you'll save money by refinancing.


Preapproval can help you get the most competitive rate. Michael Bradley, internet sales manager at Selman Chevrolet in Orange, California, encourages buyers to apply for financing before they get to the dealership, then to ask the dealer to beat their rate.

Recently, Bradley has seen more shoppers coming in with preapproved loans from credit unions, but others, he says, are waiting for 0% financing from car manufacturers' lending companies. These loans aren't offered as frequently as in the past, he says, "so when they come out, people jump on them." Search a carmaker's website for information on low-interest financing deals and other incentives.


While the loan contract is long and the verbiage is dense, it's important to review it carefully before signing. Double-check the numbers using a loan calculator. Mistakes — sometimes intentional — do happen, says Oren Weintraub, president of car-buying concierge service Authority Auto in Tarzana, California, who reviews contracts for clients.

If the numbers don't add up, make sure the lender hasn't slipped in extra items you don't want, like an extended warranty or gap insurance. And question any extra fees you weren't told about initially or that other lenders don't charge.


This article was provided to The Associated Press by the personal finance website NerdWallet. Philip Reed is a writer at NerdWallet. Email:

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