The lowest rates go to borrowers with strong credit and cash down
The interest rate you receive on a used car loan depends almost entirely on your credit score, how much money you put down, and which lender you choose. Banks and credit unions typically offer lower rates than dealerships, but only if your credit score is 700 or higher. If your score is below 620, you will pay significantly more no matter where you borrow — sometimes 10 to 15 percentage points higher than the best available rates.
The single most effective way to lower your rate is to bring cash to the negotiation. A larger down payment — ideally 20 percent or more of the car's price — signals lower risk to the lender and often unlocks better terms. Even a 10 percent down payment can move you into a better rate tier than zero down.
Shopping across multiple lenders before you visit the dealership matters more than most people realize. Each lender pulls your credit report, but multiple inquiries within 14 days count as a single inquiry for credit scoring purposes. This means you can check rates at three or four places without damage to your score.
Key Takeaways
- Banks and credit unions almost always offer lower rates than dealerships, but require a credit score of 700 or higher to access their best terms.
- Putting down 20 percent or more of the car's purchase price is the fastest way to lower your interest rate, regardless of your credit score.
- Getting pre-approved for a loan before visiting a dealership gives you negotiating power and lets you compare the dealer's offer to a real alternative.
- Your credit score, the loan term length, and the car's age all affect the rate you receive — older cars and longer terms typically carry higher rates.
- Checking rates at multiple lenders within a two-week window counts as a single credit inquiry, so shopping around does not harm your score.
Credit unions typically beat banks and dealerships on rate
Credit unions offer some of the lowest rates available, often 1 to 2 percentage points lower than banks for borrowers with the same credit score. The catch is that you must be a member, and membership rules vary. Some credit unions are open to anyone in a geographic area; others require you to work for a specific employer, belong to a certain organization, or have a family member who is already a member.
If you belong to a credit union, call and ask for their current used car loan rates. Tell them the age of the car you are buying and the loan term you are considering — a 36-month loan will have a different rate than a 72-month loan. Many credit unions will give you a rate quote over the phone without pulling your credit report.
If you do not belong to a credit union, you can sometimes join one through a membership organization. Some credit unions allow membership through groups like the National Association of Educators or the Military Officers Association. Check whether you may have access to before you assume you cannot access their rates.
Banks require higher credit scores but offer competitive rates
Traditional banks — both large national ones and smaller regional banks — usually require a credit score of 700 or higher to offer their lowest rates. If your score is between 650 and 700, you will still get a rate from a bank, but it will be higher than what someone with a 750 score receives. Below 650, many banks will decline to lend at all.
Call your own bank first. If you have a checking or savings account there, you may receive a small rate discount — sometimes called a "relationship discount" — of 0.25 to 0.5 percentage points. Even if the discount is small, it is worth asking about.
Online banks and online lending platforms like LendingClub or Upstart sometimes offer rates competitive with traditional banks, and a few will work with credit scores as low as 580. The tradeoff is that the process process is entirely digital, and you will not have a loan officer to call if something goes wrong during the process.
Dealership financing is convenient but rarely the cheapest option
Dealerships can arrange financing through their own lenders or through banks and credit unions they partner with. The rate a dealership offers is almost always higher than what you would receive by going directly to the lender yourself. The dealership makes money by marking up the rate — they might receive a 5 percent rate from their lender and offer you 6.5 percent, keeping the difference.
Dealership financing makes sense only if you have already been turned down by banks and credit unions, or if the dealership is offering a special promotion like zero percent financing on certain models. Even then, read the fine print: zero percent offers often require excellent credit, a large down payment, or a short loan term like 36 months.
If you do finance through a dealership, use it as a backup plan, not your first choice. Get pre-approved for a loan from a bank or credit union first, then tell the dealership you have another offer. Many dealerships will match or beat an outside offer to keep the sale.
How your credit score, down payment, and loan term affect your rate
Three factors move your interest rate up or down more than anything else. Your credit score is the biggest one — the difference between a 620 score and a 750 score can be 5 to 8 percentage points. A larger down payment reduces the lender's risk and typically lowers your rate by 0.5 to 1 percentage point for every 10 percent you put down. A shorter loan term — 36 months instead of 72 months — usually comes with a lower rate, because the lender is exposed to risk for less time.
The age and mileage of the car also matter. A 2019 model will have a lower rate than a 2010 model, because newer cars are worth more if the lender has to repossess and sell it. A car with 50,000 miles will may have access to for a better rate than one with 150,000 miles.
If you are deciding between a 48-month loan and a 60-month loan, ask the lender for the rate on both. Sometimes the difference is only 0.1 or 0.2 percentage points, and the lower monthly payment of the longer loan might be worth it. Other times the difference is larger, and the shorter loan saves you real money in interest.
Getting pre-approved before you shop gives you negotiating power
Pre-approval means a lender has reviewed your credit and income and committed to lending you a specific amount at a specific rate, usually for 30 to 60 days. It is not a binding contract — you can still walk away or shop for a different car — but it gives you a real offer to compare against what a dealership proposes.
To get pre-approved, contact a bank or credit union with your Social Security number, recent pay stubs, and proof of residence. The lender will pull your credit report and give you a rate and maximum loan amount within a few hours or a few days, depending on the lender. Some credit unions and online lenders can pre-approve you in minutes.
Bring the pre-approval letter to the dealership. If the dealership's financing offer is worse, you can decline it and use your pre-approved loan instead. If the dealership matches or beats your pre-approval rate, you can decide whether the convenience of financing through them is worth any small difference in rate.
Refinancing later is an option if rates drop or your credit improves
You do not have to keep the loan you started with. If interest rates drop significantly — usually a full percentage point or more — or if your credit score improves after a year or two of on-time payments, you can refinance the loan with a different lender at a lower rate.
Refinancing means taking out a new loan to pay off the old one. You will pay a small fee — usually $0 to $300 — and you will have a new loan term. If you refinance a 60-month loan after 24 months, you can choose a new 36-month term, which will raise your monthly payment but save you interest overall.
Refinancing makes the most sense if you have at least two years left on your current loan and the new rate is at least 1 percentage point lower. Check with your current lender first — some will refinance their own loans at a lower rate without charging a fee if your credit has improved.
Frequently Asked Questions
What credit score do I need to get the lowest rate?
Most lenders offer their absolute lowest rates to borrowers with scores of 750 or higher. Scores between 700 and 750 still receive competitive rates, usually within 1 to 2 percentage points of the best available. Below 700, rates climb noticeably, and below 620, most traditional lenders will either decline or charge significantly more.
Should I pay off my old car loan before getting a new one?
Not necessarily. If you still owe money on your current car, the dealership can roll that amount into your new loan — called being "upside down" — but this increases your new loan amount and your monthly payment. If possible, pay off the old loan first or bring enough cash to cover what you owe, so you start the new loan with a clean slate.
Does shopping around for rates hurt my credit score?
Multiple rate inquiries within 14 days count as a single inquiry for credit scoring purposes, so shopping at three or four lenders in one week will not damage your score. However, each inquiry does appear on your credit report, and lenders can see that you have been shopping. explore within a short window to minimize this effect.
Is a longer loan term always a bad idea?
A longer term means a lower monthly payment but more interest paid overall. A 72-month loan on a $20,000 car might cost $3,000 more in interest than a 48-month loan. However, if the longer term is the only way you can afford the car, it is better than not buying at all. Compare the total interest cost, not just the monthly payment.
Can I negotiate the interest rate at a dealership?
The interest rate itself is usually set by the lender, not the dealership, so there is little room to negotiate. However, you can negotiate the car's price separately from the financing terms. A lower car price means a smaller loan and less interest overall, even if the rate stays the same.