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3 Tips to Get a Low APR on a Car Loan

Getting a Lower APR on a Car Loan
Austin Kilham
Austin KilhamUpdated March 14, 2023
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After the purchase price of the vehicle, the interest you pay on an auto loan is the greatest expense involved in buying a car. For example, if you buy a $35,000 car with a 20% down payment at the average prime auto loan interest rate of 4.9%, you could end up paying more than $3,600 in interest over the five-year life of the loan. Interest and fees, which are represented by the annual percent rate (APR), can add a substantial chunk to the cost of buying a car. Fortunately, there are steps you can take to reduce that amount. Wondering how to lower your APR on a car loan? Read on to learn the way APR works, and for tips on how to lower APR on a car loan. 

What Is APR on a Car Loan?

APR represents the total cost of financing a car. This is important for understanding car loans and how they work. APR includes both the interest rate and fees you’ll pay on an auto loan. (The fees may also be known as “prepaid financing charges.”) When you’re looking at different car loans to find the best one for you, be sure to compare APRs rather than just the interest rate.Recommended: Car Loan Terms Explained

How Does APR Work?

To understand how APR works, it’s important to have some background on interest rates. Interest is the amount of money a bank charges you in order to borrow money. Banks set auto loan interest rates based on their prime rate, which may be based largely on the federal funds rate set by the Federal Reserve. In addition, lenders consider other factors for determining auto loan interest rates, including your credit history and debt-to-income ratio, which is the amount of monthly debt you have compared to your gross monthly income. Part of the way APR is calculated involves adding the interest rate on the loan plus prepaid finance charges, such as origination fees, which are used to cover the cost of underwriting the loan. The interest and fees are represented together as an annual percentage. Lenders are required by the federal Truth in Lending Act to disclose the APR of a loan when they advertise interest rates. Usually the APR will be higher than the interest rates, unless there is some sort of rebate or promotion happening. 

How to Lower APR on a Car Loan

Lowering your APR can potentially save you a lot of money over the life of a loan. There are a number of strategies you can choose to consider to help with lowering car payments, from negotiating fees and interest, to boosting your credit score. Here’s how to get a lower APR on a car loan.

1. Negotiating APR

A good negotiation with a lender starts with good research. Once you’ve determined how much you can afford to spend on a car, and you’ve chosen a make and model, shop around to different lenders to see what APR they will offer you. This helps establish a baseline for what you’re likely to qualify for.Armed with this information, you can approach lenders to see if they will match — or beat — your best offers. In addition, ask them about reducing fees on the loan. Lenders may be able to lower certain fees, or even waive them entirely.

2. Maintaining Good Credit Score

The APR you’re offered will mainly be based on your credit history and credit score. Your credit score takes into account your payment history, including whether you’ve made on-time payments in the past. It also considers the amount of debt you already owe, and the amount of available credit you’re using. Finally, it typically includes the length of your credit history (longer is better), what types of debt you carry (a mix of different types of debt, such as credit cards and loans, is ideal to show you can manage them), and whether you’ve sought new credit recently. A higher credit score signifies that you’re creditworthy. Lenders tend to consider people with high scores to be more responsible borrowers and less likely to default on  loans. As a result, lenders typically offer them lower interest rates. You can help keep your credit score strong by making on-time payments. This, in turn, can help you qualify for preferential rates. In fact, paying your bills regularly and on time can even make the effect a car loan has on your credit score a positive one.If you already have an auto loan, you might consider refinancing it, especially if your credit score improves. With auto refinancing, you pay off your old loan with a new one, ideally with a lower interest rate. The refinancing car loan process may be worth it if it saves you money.

3. Adding a Co-borrower or Cosigner

If your credit score is low, one method for how to get a lower APR on a car loan is to add a creditworthy co-borrower or cosigner to the car loanA co-borrower is usually a spouse or partner who takes equal responsibility in making car payments. That means they also have equal ownership of the loan and the vehicle. A cosigner agrees to make loan payments if the primary borrower is unable to do so. He or she doesn’t have equal ownership rights to the vehicle.Lenders will consider the credit score of a cosigner or co-borrower when you apply for a loan. So someone with a high credit score could help you get a more favorable rate.Recommended: 12 Questions to Ask When Buying a Used Car

The Takeaway

Learning how to get a lower APR on a car loan can save you a lot of money. It starts with being willing to negotiate APR terms with lenders and keeping your credit score high. Another option for potentially getting a lower APR is through auto loan refinancing. Lantern can help you shop for the best rates, prequalify for loans, and apply for a loan — all in one place.

Frequently Asked Questions

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Is it hard to lower the APR on a car loan?
How long does it take to lower the APR on a car loan?
Photo credit: iStock/Paolo Cordoni

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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