To get the best possible interest rate on a car loan, it's important to understand two things: the current marketplace for interest rates, including different lender options and financing offers, and your personal financial situation and its limitations. Several primary factors determine your interest rate:
Car buyers borrow money from three primary lending sources: banks, credit unions and automakers. Loans from any of these sources may come through the dealer, who often serves as the middleman and takes a cut in the process.
Getting a loan through a car dealer is not, however, automatically more expensive. In fact, dealers provide the only way to get specialized low rates, including zero-percent financing, from automakers.
Car dealers borrow money at wholesale interest rates, which they mark up and pass on to you. Because the dealer's rate is lower, the rate you get may be no higher than one you arranged yourself. Still, the only way to make sure of this is to know what your best rate is before you get to the dealership.
In general, new-car loan rates are better than used-car rates. Usually, only new cars qualify for zero-percent financing, though some automakers occasionally push certified pre-owned cars with zero-percent offers. In general, the older the car is, the higher the interest rate is.
Sign up for the shortest term length you can afford to keep your total interest lower; the longer term you have for a car loan, the more you'll pay in interest. The average term for a new-car loan is more than 60 months now, and this leaves consumers vulnerable to owing more on a loan than their car is worth, a condition that's often referred to as being upside down, or under water.
If at first you don't succeed, don't try, try again until you've determined why you were rejected and have taken steps to address it. Credit scores are the primary determinant of who gets approved for loans, and if you didn't check your credit score before you applied the first time, it behooves you to do so before applying again. Many loan applications automatically trigger a credit check, each of which can knock a few more points off your credit score, making what might have been a bad situation even worse.
If your credit score is accurate and you've taken all possible steps to improve it, you're ready to do what we recommend for all car buyers: Shop around for a good interest rate before returning to a dealership. Credit unions are a great option; while they're perceived as exclusive, their interest rates are typically lower than many banks and they're more likely to examine a subprime applicant's circumstances and make exceptions if problematic credit history results from one-time medical expenses, unemployment or divorce.
Don't overlook the bank where you have a savings or checking account. Your financial history won't be a mystery to any potential lender, but an existing relationship can work in your favor, as it's easier for a bank to sell services to its customers than it is to find new customers.
Finally, don't rule out financing a car at the dealership. Only a dealer can offer new-car finance rates from the automaker; those rates are sometimes the lowest available. Also, if you've taken our advice but had little success with other loan sources, a dealership might be more willing to make financing accommodations if you're buying one of its cars, especially a used one. If the dealership that denied you the first time was smaller, a larger one might have more tolerance for risk or have good relationships with more lenders.