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How To Negotiate a Car Loan: Try These 5 Steps To Get the Best Terms

Car loan negotiation is a valuable art that could save you money.

June 27, 2022

You need reliable transportation to go to school or work — and maybe to take a few road trips. Your car has a big impact on many areas of your life, including your finances. 

Whether you’re looking for a new car or a used car, the car payment will be a major consideration. 

Depending on how you finance your car purchase, it can be tough to pay down the balance. It’s important to be careful when taking out an auto loan so that you don’t pay more than necessary. This is why you’ll want to know how to negotiate a car loan before you sign on the dotted line. 

We’ll explain why it’s beneficial to negotiate your car loan and the five steps you can take.

Why should I negotiate my car loan?

It’s possible to negotiate most of the terms of your car loan with a lender. Negotiations might sound intimidating but learning how to negotiate a car loan can help you: 

  • Lower the payoff total: If you manage to knock $2,000 off the purchase price of a car, that’s $2,000 you don’t have to pay off, plus interest. 

  • Score extra bonuses: Sometimes a dealer will throw in expensive freebies, like floor mats or roadside assistance, to make their offer more competitive. 

  • Pay less in interest: When you shop around for a lower annual percentage rate (APR), you could pay less in interest over the life of the loan. This can save you thousands of dollars over several years.

How to negotiate a car loan in 5 steps

Car dealerships are infamous for tacking on “gotchas” like high interest rates and fees that aren’t in your favor. When you buy a car, you need to be an advocate for yourself.

The first step is arming yourself with knowledge and learning how to negotiate a car loan. Follow these five steps to negotiate a better deal.

1. Understand your finances first

What is the current state of your finances? How much car can you afford? What’s a reasonable monthly payment? 

It’s tempting to start shopping for a new car, but you need to understand your financial situation before you pick a make and model. That’s because your finances have a big impact on the type of car you can afford. You might want a Jeep Wrangler, but if the total cost is too high, you might need to set your sights on something more economical, like a Toyota Corolla.

It’s also a good idea to estimate the costs of owning and maintaining a car, including:

  • Monthly payments

  • Maintenance, like oil changes

  • Gas

  • Insurance

If you aren’t sure how much car you can afford, look at your budget to determine how much extra income you have per month to cover the car costs. You’ll also need to look at how much cash you have on hand to make a down payment.

How much do you need for a down payment? That will likely depend on the car you’re buying. Search for online car listings to see how much new and used cars cost in your area. Once you find a vehicle that interests you, check the car’s value using Edmunds True Market Value or Kelley Blue Book to make sure the vehicle is listed at a fair price.

2. Check your credit score

If you’re wondering how to negotiate a car loan, know that a lot of it comes down to getting the best interest rate. That’s why it’s important to know your credit score before you buy. 

Your credit score will impact the auto loan rates a lender will offer you. On average, people with excellent credit get a 4.96% APR, while people with bad credit get an average APR of 18.21%. This is why knowing your credit score can help with your negotiations. 

For example, if you know a lender won’t budge on the interest rate because of your credit score, you might be able to negotiate with them on loan terms or add-ons instead. Knowledge is power — equip yourself with this information when it’s time to negotiate your loan. 

3. Shop around for loans

You don’t have to get a loan from the same place you buy your car; shop around with dealers, banks and credit unions.

Each lender will have its own requirements and factors that will determine your rate. This means that each lender may offer you a different rate for your car loan, allowing you to choose the most competitive option. 

Also, keep in mind that car dealerships might mark up the interest rate. Try going into negotiations with a preapproval letter that has a lower interest rate; you might have more bargaining power. 

Shopping for loans may delay the car-buying process a bit. But since you’ll be on the hook for car loan payments for years, a little bit of upfront detective work could save you thousands in the long run.

4. Haggle with the dealer

You can’t haggle with a salesperson on title fees or taxes, but almost everything else is open for negotiation, including: 

  • Total price of the vehicle: Instead of focusing just on getting a low monthly payment, look at the total cost of the vehicle. It’s tempting to opt for a cheap monthly payment, but these can sometimes cost you more because of a longer loan or higher interest. If you can get the dealer to lower the sticker price of the car, that’s a win. 

  • Loan term: Just because the dealer suggests a seven-year loan term, that doesn’t mean you have to agree to it. You can opt for a shorter loan term with a higher monthly payment to pay off the car more quickly. The good news is that shorter loans often come with lower APRs, so you could save a lot of money in interest.

  • Trade-in value: Are you trading in your old car? You can ask the dealer for more money for your trade-in. By applying the value of the trade-in against your loan amount, you can reduce the overall cost of the loan. 

  • Add-ons: If the dealer isn’t budging on other terms, you can ask for complimentary incentives like window tint, upgraded wheels or an electronics package. 

5. Watch out for “gotcha” clauses

Once you’ve negotiated your car loan, it might feel like you’ve crossed the finish line when it’s time to sign the contract. But this is when you should grab a coffee and a magnifying glass because car loan contracts are infamous for “gotchas.” 

Be on the lookout for things like: 

  • Incorrect terms: Double-check that all of the numbers you verbally agreed to are correct in the contract. What’s in the contract is what’s legally binding, so make sure everything you negotiated is actually on paper. 

  • Prepayment penalties: Some lenders will charge you a fee if you pay off your car loan early. They do this because early payoffs usually mean the lender is missing out on interest payments. This doesn’t have to be a deal breaker, but you should be aware of any penalties, how much they are and if they’re worth it to you.

  • Loan fees: Dealer fees, origination fees, delivery charges and other fees can increase your total balance. 

  • Unwanted add-ons: Did the dealer throw expensive or unwanted add-ons into the contract? If you don’t want a paid service plan or extended warranty, tell them to remove it from the contract.

  • Interest rate variability: Sometimes lenders will give you a lower interest rate but with variability. Variable interest rates are tricky because they can go up or down over the life of the loan. If you don’t like surprises, it might be worth asking for a fixed-rate APR instead.

If you see something in the contract that you didn’t sign up for, don’t be afraid to walk away. Car dealers and lenders are a dime a dozen — shop around to get the best price for your needs.


Negotiation is part of car buying

A high loan balance or high interest rate on a car loan can make it tough to find breathing room in your budget. If you’re buying a car, try not to rush things. When you master how to negotiate a car loan, you’ll be able to advocate for your needs and potentially reduce your payoff total. 

Don’t let the dealership confuse or intimidate you. As the consumer, you have the power in the relationship. 

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