Can You Negotiate the Interest Rate on a Car Loan?

You might have heard people talk about negotiating car prices at dealerships. Maybe you’ve even haggled on a car price yourself. But can you negotiate interest rate on a car loan?

You might be surprised to learn that in some cases, you can. 

Can you negotiate interest rate on a car loan?

Many dealerships and lenders are willing to negotiate with you on your car loan’s interest rate. However, if you want to increase your chances of success, you should have a plan in place. Don’t just ask for a lower rate and expect them to say yes.

How to negotiate your car loan interest rate

If you want to try to secure a lower interest rate on a car loan, you might try one or more strategies.

Know your credit score before you go in

The higher your credit score, the more likely a lender will be to negotiate rates with you. When you’re getting a car loan, a credit score of 670 or higher is generally considered “good.” If your score is lower than that (and especially if it falls in the “poor” range), lenders might refuse negotiation altogether.

Get pre-approved before visiting the dealership

If you’re hoping to negotiate a lower interest rate, this is a critical step to take. Many car dealers won’t lower their interest rates just because you ask. But if you show them a pre-approval letter, they might be willing to beat the interest rate you’ve already been approved for.

Shop competing offers

If one dealer is unwilling to negotiate interest rates with you, that doesn’t mean all dealers will be. Shop around for loan pre-approvals and visit competing dealers. It adds a few extra steps to the process, but it may save you a significant amount of money over time.

Offer a larger down payment

Do you have enough cash to increase your down payment? If so, you might be able to negotiate a lower interest rate. When you make a larger down payment, you decrease the total risk to the lender. That usually leads to more favorable loan terms, including lower interest rates.

Negotiate the rate separately from the price

In general, it’s best to negotiate the purchase price of a vehicle before you start negotiating the rate. Remember that if the dealer knocks a few hundred dollars off the car’s total price, you’re saving that amount plus interest. 

Once you and the dealer have agreed on the purchase price for the car, you can move on to negotiating the rate if you’d like to.

What factors affect your car loan interest rate?

As you think about how to negotiate a lower car loan rate, you might wonder what determines your interest rate in the first place. There are more factors at play than many people realize.

Your credit score and credit history

This is usually the most important factor. The higher your credit score, the less risk you pose to the lender, and the lower your rate is likely to be.

The age of the car

Used cars often come with higher financing rates. That’s because they pose a greater risk for lenders. Used cars have lower resale values, meaning it may be harder for the lender to recoup their money if you default on the loan.

Benchmark interest rates

The Federal Reserve sets baseline interest rates. It often increases rates to curb inflation and lowers them to boost economic growth. When the Fed changes rates, lenders generally do, too.

Your down payment

The loan-to-value (LTV) ratio is the ratio between the amount of the loan and the asset securing it. When you make a large down payment, that reduces the LTV ratio and decreases risk for the lender. Because the lender’s risk is reduced, your rate is, too.

The loan term

Longer loan terms create more risk for lenders, so they usually come with higher interest rates.

Dealership financing vs. outside lenders: Which gives you more room to negotiate?

If you’re hoping to negotiate a lower interest rate than the one you’re offered, you might wonder whether you’re more likely to find success with a dealership or an outside lender. 

You generally have more room to negotiate rates with a dealership, but that’s because dealerships often increase interest rates to boost their profits. 

For example, if you finance a car through a dealer, the dealer may be able to secure a car loan with 6% interest from a lending partner. However, they may increase the rate to 7.5% and keep the extra.

When you apply for a loan with a bank or credit union, the rate you’re offered is usually as low as the lender is willing to go.

This is why many people suggest getting a preapproval letter from an outside lender before visiting a dealership. A dealer may be willing to beat that rate if it means keeping your business.

How to lower your car loan rate after you've already signed

If you’ve already signed a car loan with your lender, they’re very unlikely to agree to drop the interest rate. Most of the time, the easiest way to lower your rate after singing is to refinance. That’s when you take out a lower-rate loan from a different lender and use it to pay off your current loan.

It’s usually best to wait to refinance until you’ve improved your credit score or gotten a cosigner. If interest rates have dropped significantly, you might be able to refinance with a lower rate even if your credit score has stayed the same.

Better credit can lead to lower rates

Having a good credit score can open many doors in life. Generally, the higher your credit score, the lower the interest rate on your car loan is likely to be. 

If you’re planning on taking out a new car loan in the future or you want to refinance one that you already have, it may be worth dedicating some time and attention to boosting your credit score. 

Are you unsure where to start? That’s why Kikoff is here. We’re a credit-builder app designed specifically for people with limited credit history, bad credit, or no credit at all. We offer lines of credit, secured credit cards, debt negotiation tools, and other resources to help our members work toward their credit goals.

Joining is free, and we don’t check your credit. Get started with us today!