In September 2022, the average transaction price (ATP) of a new car in the United States reached $48,094. That’s $2,775, or 6.1% higher than the ATP back in September 2021!

Such exorbitant ATPs have also resulted in auto loan premiums becoming increasingly expensive. Some borrowers now even pay over $1,000 monthly for their car loans.

With such high costs, you may already be on the verge of giving up your dream car.

You don’t have to; if you know how to finance a car, you can drive home on your new ride without breaking the bank.

To that end, we’ve created this guide to the top strategies to keep your car financing costs minimal. So keep reading, as our tips can help you secure an auto loan for less.

Check Your Credit Score

A credit score is a numerical representation of your credit behaviors and history. It can range from 300 to 850; the higher it is, the more creditworthy you are. In this case, you have better chances of securing an auto loan with low-interest rates.

By contrast, the lower your credit score, the riskier you are to lenders, so they may not approve your loan. Even if they do, expect to pay a higher interest rate. So, having a fair to low credit score (anything below 670) makes borrowing more expensive.

Fortunately, the average credit score in the U.S. reached an all-time high of 714 in 2021. The bad news is that since this number is only the average, it indicates many others have lower scores.

To learn about your current credit score, ask your credit card provider. Most card issuers provide this info for free.

If your credit score is above 670, that’s fantastic news, as you’ll likely get low-rate offers.

But if your score is below 670, consider waiting until it improves. Then, you can boost your score by paying down your loan and credit card balances. At the same time, avoid applying for new credit and reserve it for your car loan.

The wait may be worth it, as even a slight increase can improve your odds of securing a better offer. In the meantime, you can find auto loan rates here and compare them to see how big a difference a higher score can make.

Review Your Credit Report

Your credit report is a summary of your credit history. It’s a statement of your credit activities, such as credit card accounts and loan statuses. It also includes information about liens, delinquencies, and foreclosures.

So while a credit report differs from a credit score, it can affect your credit score. For example, if you’ve had several delinquencies reported, they can reduce your score.

The problem is that reporting errors are common, affecting 1 in 3 Americans. If you’re one of these folks, your credit score may have dropped because of someone else’s fault. That’s also why it pays to review your report every time you apply for new credit.

Luckily, the three major U.S. credit reporting bureaus offer free credit reports. They used to provide only one free copy yearly, but they’ve temporarily changed it to weekly.

Take advantage of those no-cost weekly copies, which are available throughout 2023. Then, review your report and ensure there are no erroneous entries. If you find any, dispute them and have them fixed by the reporting agency.

Make the Biggest Possible Down Payment

The higher your down payment is, the less you’ll pay over the life of your auto financing program. After all, you’ll borrow less money, reducing your interest payments.

So as much as possible, save enough so you can make at least a 20% down payment. For example, if the car you want to finance costs $45,000, your minimum down payment should be $9,000. That way, your lender can only apply the interest rate on the $36,000 you’d borrow from them.

Remember: Every dollar you borrow counts, especially for longer-term loans. For instance, if the interest rate on a $36,000 5-year car loan is 10%, your total interest payments would be $18,000. However, if you borrowed $40,000 on the same terms, you’d owe your lender $20,000 in just interest payments.

That’s why as soon as you plan to buy a new car, start saving as much as you can immediately.

Consider Trading in an Older Car

If you have an older car that still runs, consider trading it in and applying its value to your new purchase. The trade-in value can significantly reduce the amount you need to borrow for the new auto loan.

For example, suppose you take your older vehicle to the same dealership where you bought it. The dealership then tells you its trade-in value is $10,000.

Let’s also say the same dealership offers you a financing deal of $45,000 on a new car. Accept their trade-in offer, and the new loan will only cost $35,000, much less if you make a sizeable down payment.

Look Beyond Low Monthly Payments

There are two possible reasons you might get low monthly payments when financing a car. The first is if you’re borrowing less, which can be due to a car’s low price, or if you’re making a sizeable down payment. In this case, you’re likely getting a good deal.

If neither of that is true, then the reason is that you’re getting an offer for a much longer-term loan. While it may be easier to afford low monthly payments, in this case, it means you pay more toward interest. In short, your loan will cost you much more in the long run.

So before you get all excited and sign the dotted line, review your term options first.

If you can afford to make higher monthly payments, do that to shorten your term. The shorter it is, the less you’ll pay toward interest and the less time you’ll be in debt.

That’s How to Finance a Car Smartly

We hope you found this guide on how to finance a car informative. Now you know it starts with improving your credit score and checking your credit report. You also learned that making a larger down payment, a trade-in, and getting a shorter term can help.

All those steps can boost your chances of securing a lower-rate, more affordable car loan.

Are you ready to read other educational guides like this? Then browse more of our news and blog posts now!