What you need to know to save money

Having good credit can save you up to $10,000 on a car purchase. Having bad credit can cost you just as much.

Your credit score largely determines how much interest you pay on a car loan. And the interest rates are high.

The average new car loan was $40,366 in 2023. But the total cost of the loan can range from $46,419 to $57,339, depending on the interest rate, according to an analysis by personal finance site MarketWatch Guides.

The average used car loan was $26,685. However, when you factor in interest, the total cost of this loan ranges from $32,205 to $43,812.

Auto loan interest rates are at their highest in years. According to Experian, the average interest rate for a new car ranges from 5.4% for those with the highest credit scores to 15.6% for those with the lowest credit scores. For used cars, the average interest rate ranges from 6.8% to a whopping 21.6%, depending on your credit score.

What is a good credit score for a car loan?

Even a consumer with bad credit can get a car loan. However, the loan will likely come with an astronomically high interest rate, which will dramatically increase the overall cost of the car.

“With a low interest rate, you may pay thousands of dollars less than with a high interest rate,” said Kimberly Palmer, financial expert at NerdWallet.

The wide range in auto loan interest rates is the result of a complicated math. If you have a low credit score, lenders assume you’re a bigger risk. And a car is a diminishing asset: With each year that passes, it’s typically worth less.

The interest rate “takes into account the risk the lender takes when lending you money for an asset that is losing value,” Palmer said.

The good news: There are more cars today than in recent years. Prices may be high, but they are not rising. A new car costs an average of about $49,000, and a used car about $29,000.

More good news: The auto loan industry is “a very competitive sector,” Palmer said. Lenders want your business.

Here are some tips to help you save money on your next car.

Choose a less popular car

Some models are popular. Others are not. Look for cars “that people don’t buy that often,” says Brian Moody, editor in chief of Kelley Blue Book and Autotrader.

“There’s a car called the Acura ILX that’s no longer made,” he said. “I’m sure it’s a great car, but most people don’t search for an Acura ILX online.”

Less popular cars are often available at a reduced price. Look for discontinued models, sedans and lesser-known brands.

Avoid fancy features

Luxury features such as heated seats, sunroofs and high-end sound systems can significantly increase the price of a car. Consider what you really need.

And, “The more stuff you have on the car, the greater the chance that something will break,” says Lisa Gill, an investigative reporter at Consumer Reports.

Buy a car without a rear view camera

The rearview camera became standard equipment in 2018. If you are buying an older car, you can save thousands of dollars by opting for a model without a camera. Then you can buy one yourself.

“You can add a backup camera for about $800,” Moody said.

Find out your credit score

Many consumers enter a showroom without knowing what their credit score is or how it might impact their purchase, experts say.

“I think the biggest mistake you can make is just walking into a car dealership – whether it’s a new car or a used car – and not knowing what your credit score is,” Gill said.

Many banks and credit card companies allow you to view your credit score for free.

According to Gill, the FICO score of 8 is commonly used for auto loans. For a fee, you can visit the FICO website to see your score. Gill says it’s worth the money.

Get pre-approval for a car loan

In addition, it is a mistake to go to a car dealership without a pre-approved loan, experts say.

“I would definitely go to my bank or credit union first and get pre-approved,” Moody said.

During pre-approval, the lender checks your creditworthiness and determines how much you can borrow and at what interest rate.

With pre-approval, “the lender is basically saying, ‘We’ve determined that this fits your budget,'” says David Straughan, senior automotive journalist at MarketWatch.

Once you have a pre-approval in hand, “you’ll be amazed at how willing dealers are to work with you,” Straughan says, because they know you’re ready to buy.

Compare the prices for a loan

First, contact your own bank to apply for a car loan. If your credit isn’t that great, consider joining a credit union.

Credit unions are registered “almost like a nonprofit organization,” Gill said. “And usually one of their missions is to make it easier for the community to buy cars and homes.” That means they offer competitive interest rates.

Once you have received pre-approval, “give the merchant the opportunity to undercut your bank’s offer,” advises Moody.

Make a higher down payment

A larger down payment when purchasing a car has several advantages.

First, it lowers your potential interest rate. Interest rates rise and fall partly with the loan-to-value ratio, Straughan said. A higher down payment means a lower interest rate.

Second, it means lower monthly payments because you borrow less money.

Third, it means that you pay less interest over the life of the loan because you are borrowing less money.

Work on your creditworthiness

If you still have some time before buying a car, try to improve your credit score.

According to MarketWatch analysis, if you increase your score from 650 to 700, you could potentially lower your interest rate on a used car from 14% to under 10%, saving you more than $3,000.

Get a free copy of your credit report. Look for “errors that could drag your score down,” Gill says, including accounts incorrectly reported as delinquent or in collections. Report them to the credit bureaus.

Try to pay off high credit card balances. Credit agencies reward you when you use less of your available credit limit.

If you have a missed payment on your credit report, you should ask your creditor for forgiveness, Gill advises.

More: Should I go into debt to renovate my house? High interest rates put owners in trouble

Remember: you can refinance at any time

Even if you end up with a “bad” car loan, that is, one with high interest rates and high payments, you can still refinance it.

Work on improving your credit score. Experts say that a higher credit score will allow you to get lower interest rates when refinancing.

According to Straughan, interest rates could drop in the next six months to a year, giving you the opportunity to get a better rate.