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The Easiest Way To Renegociate Your Car Loan Interest Rate


According to a 2019 Experian study during the last quarter of 2019, the average new car loan interest rate was 5.76%, while the average used car loan came in at nearly double that at 9.49%.

Hoo boy. That might not sound like a lot at first, with credit cards having APRs that regularly hit 30% or more.

But let’s look at it another way, and I think you’ll see where I’m going with this.

First things first, let’s rewind a couple of years to a pre COVID-19 world. Remember what things were like back then?

The year is 2018, and market researchers at Edmunds have found a problem. During an annual report on car prices, an analyst found a problem – the average new car was leaving the lot for over $6,500 dollars more than it cost only 5 years ago.

The culprit? Rising interest rates, which in 5 years managed to climb from 4.4% for a new car loan in 2013 to 5.7% by 2018.

The study also cited rising car prices, and longer loan terms as a factor.

While it can be easy to ignore this as a part of life, if you really want to save money, you shouldn’t be.

The average new car runs off the lot at an average price of around $36,700 dollars.

Call Dave Ramsey – We’ve Got A Debt Problem

Despite being a smart guy who has helped millions of Americans get out of debt, Dave Ramsey has famously said that he has “a PhD in D.U.M.B”.

On his nationally syndicated radio show, Dave regularly rips people a new you know what over some of the ludicrous debt they rack up. One of his favorite targets, and rightfully so, is car loans.

Yeah, I’m not going to beat around the bush. 24% on a car loan is freaking ridiculous.

But you probably know that – you’re smart. You are here after all to learn the secret to paying a lower interest rate after all.

Now let me illustrate the problem. For the sake of comparison, let’s say you were thinking about buying a newer car.

You can’t decide if you want to buy a new Toyota Corolla or a used one.

The new 2020 Corolla comes in at a hefty price tag of $37,000, while the used Corolla comes in at the average US used car price of $20,200.

We’ll assume your planning on putting down $2,000 dollars, with no trade in, and are planning on taking out a standard 5 year car loan.

Which means:

  1. New Corolla Amount Financed: $35,000
  2. Used Corolla Amount Financed: $18,200

To give you an idea of how much you could be paying in interest, take a look at the chart below.

Interst rates are provided by Experian.

Credit ScoreNew Car Interest RateUsed Car Interest RateNew Car Interest PaidUsed Car Interest Paid
Deep Subprime (300 to 500)14.25%19.81%$14,136$10,616
Subprime (501 to 600)11.51%16.88%$11,195$8,869
Non-Prime (601 to 660)7.55%10.85%$7,130$5,461
Prime (661 to 780)4.75%6.15%$4,390$2,988
Super Prime (781 to 850)3.82%4.43%$3,504$2,123

If this seems crazy to you, just remember: these are just average numbers. If your credit score is between 300-600 or so, you may see rates that are even higher than these. And that makes the choice of renegotiating your car loan that much more appealing, especially considering just how much you can save.

You Could Save As Much As $11,000 Dollars By Renegotiating Your Car Loan

You know what would be really nice to have besides COVID-19 ending?

$11,000 dollars. I sure as hell can think of a few things I’d do with $11,000 dollars if you just gave it to me right now.

I’m sure you can think of a few things too.

Now obviously, you’re probably not going to save $11,000 dollars all at once, but your savings can still easily be thousands of dollars if you re-negociate your interest rate.

First things first though, let me explain the factors that have caused you to have such a high interest rate in the first place.

Your Car Loan Interest Rate Is High Because Lenders Think The Deal Is More Risky

As they say in the business “scared money don’t make money”.

Or something like that, I’m not actually in the business, after all.

That said, what I can tell you is that your high car loan interest rate is because to the lending company that financed your car loan, you are a risk.

Lenders live and die on risk. Being able to calculate and put a price on “risk” is what keeps financial companies around the world running, including the companies who issue car loans.

“Pricing out the risk” literally means the lending company calculating out the chance that you will pay your loan versus the chance that you will not.

Companies typically use a number of measures to assess your financial risk. Everything from the amount of time you’ve been at your job, to whether you own or rent your home can influence your level of percieved financial risk.

The most common measure of borrowing trustworthiness that everyone knows about is your credit score, specifically your FICO score.

Although there are many score models, such as AdvantageScore, the one lenders use to determine your car loan interest rate is almost always your FICO score.

Your FICO score is meant to show the risk that you won’t pay what you say you’re going to pay.

The Lower Your Credit Score, The Higher Your Risk

Does Car Shopping Hurt Your Credit?

When your car insurance company looks at you, what they’re really looking for are signs that you will pay back your loan.

Your credit score is a very good indicator of this. Each of the factors that go into it are designed to help lenders assess the probability that you will pay back your loan.

Credit: My FICO

When broken down by factor, here’s what influences your credit score:

  1. Payment History: How often do you pay your accounts back on time? The more often you pay late, the higher your risk.
  2. Amount Owed: Lenders also want to see that you don’t have an unrealistic level of debt compared to your income. If you have too much debt, you run the risk of defaulting, which your lender doesn’t like.
  3. Credit History: The longer you’ve had credit, the more responsible you tend to be in the eyes of a lender.
  4. Your Credit Mix: Do you have a variety of account types? For example, credit cards, auto loans, student loans, etc.
  5. New Credit: How much new credit are you applying for? The more credit you apply for at once, the riskier it is to lenders. Those who apply for multiple accounts at once, tend to have a higher rate of default.

With that in mind – if you have a low credit score, you’re going to have a high interest rate, particularly if you get a used car.

So it makes sense to aggresively re-negociate your interest rate, especially when you consider how often interest is calculated on your loan.

The Length Of Your Loan Matters Too

Credit: ValuePenguin

Typically, the length of your loan matters too. Now let me ask you a question.

Do you think shorter loans or longer loans get better interest rates?

Think about it, but don’t cheat!

If you guessed shorter, then you’re right!

At first glance it might seem stupid that the shorter loan doesn’t have a higher interest rate. After all, the lender wants to make money, right? A short term loan should have higher interest rates so the banks can make their money.

But not quite.

See, shorter-term loans are harder to qualify for then longer term loans, and generally require better credit. More importantly, they also have a lower risk of default.

There’s that one thing lenders hate more than everything else. Risk.

And the risk is lower on short term loans, so the rate is lower in return.

There Are 2 Ways Interest Can Be Calculated On Your Loan

1: Simple Interest

A simple interest loan is most likely what most of you reading this have. A simple interest loan calculates your interest based on the balance you owe on the day when you need to pay your car loan.

This is good, because if you pay more than the amount due, your loan balance will decrease, along with the total amount of interest you’ll pay on the loan too.

If you have a simple interest rate, you’ll also be able to easily renegociate your rate using the strategies I’m going to talk about in a minute.

The beauty of lowering your rate with a simple interest loan means you’ll be able to pay your loan off faster, because more of your payment will be going toward the loan principle instead of just on interest for servicing the debt.

Precomputed interest on the other hand is a bit harder to get out of.

2: Precomputed Interest

Precomputed interest car loans have fallen out of fashion, with them being outlawed for loans longer than 61 months in the US back in 1992.

17 states went even further and outlawed precomputed interest loans entirely.

Precomputed loans however are still booming in the subprime auto market. Subprime borrowers (usually anyone with under a 600 credit score) are lured in with promises of “Bad Credit, No Credit Accepted!” or “Make above X, drive today”

Unfortunately, precomputed loans are a bitch because it’s difficult to negotiate your way out of the interest.

The way precomputed loans work, the interest on the entire loan is calculated in advance. For example, with a simple interest loan, you may owe $1,200 dollars in interest over the life of the loan. Which means, over 60 months, you’ll pay $1,200 in interest.

But, if you paid that loan off in half the time, you won’t have to worry about paying interest on the other 30 months of the loan because you have no balance.

A pre-computed loan, on the other hand, uses a formula called the rule of 78 to essentially front-load your interest. What that means is the pre-computed loan charges a much greater percentage of interest early on, so even if you pay your loan off early, the lender escapes with more of your money to laugh evilly in their New York penthouse.

Luckily for the rest of us, precomputed loans are rare! As long as you aren’t going to a subprime shop, you most likely have a simple interest loan.

Okay, just one more thing we need to talk about before we can get into the nitty gritty of strategies to help negociate your car loan payment and interest rate.

When Your Ready To Negotiate, Ask Yourself What You’d Consider A Good Rate On Your Car Loan

You thought I was going to keep going without talking about good rates, didn’t you?

A good interest rate is critical to actually reducing the amount that you pay over the course of your car loan. It’s pretty important.

That’s why I’m actually going to give you two answers. The first answer is the “literal” answer, but the second is the actual answer you’ll want to roll with heading into the negociation.

So, without further ado, this is what I consider to be a good rate on your car loan.

Now that you have some benchmarks, let’s look at some context.

First things first: rates change all the time.

Take a look at this graph of car loan rates over the last 15 or so years,

Don’t worry, that blip in the map isn’t from me getting lazy. The Fed stopped reporting on auto finance company loan rates in 2011.

As you can see, rates have generally fallen over time so what may be considered a good rate today may change tomorrow. Which is just part of the reason that I can’t really offer you a one sized fits all answer.

I could go ahead and tell you that somewhere between 4-5% is good, but that answer doesn’t take into account your personal situation at all.

And it’s for that reason I’m going to tell you that the best advice I can give you for what is considered a good rate: you need to shop around and get at least 3 different rate quotes in order to get the best rate. Several insurance aggregators have studied this stuff extensively – and the results all support that getting 3 or more rate quotes will garuntee you the best rate.

For something this big, it really pays to do it right. Once you have 3 or more rate quotes, you should have a good idea what most lenders are going to offer you. For best results when you’re applying for credit, apply for a mix of options. Credit unions, banks, etc.

You’ll usually get the best rates with credit unions, but again, you have to shop to see how things pan out.

Then, once you have your rates in hand, you’ll be ready to sit down and figure out how you’re going to get the best rate.

Now that you have all the background you’ll ever need, let’s talk about the strategies you can use to negociate your car loan interest rate.

Option 1: Lower Your Effective Interest Rate Without Refinancing

Disclaimer: This most likely won’t lower the the actual rate you have on your loan for most of you. What it will do, however, is help you avoid paying thousands of dollars in interest expenses like you might based on the chart I have above.

So while it’s not “lowering” your rate, it is saving you money. And I’m pretty convinced that if you’ve read this far, you don’t give a rats ass about the rate. You just want your money.

This option is right for you if your credit score hasn’t gone up, or the market rate for car insurance hasn’t dropped enough where it makes sense to refinance.

The way you take this option is by doing 2 things. First, you rate shop, and then you do some hard work.

Step 1: Shop around and get a triple double (of rate quotes)

Go out and get at least 3 different quotes from lenders, as if you were going to refinance. Unfortunately, these inquiries may ding your credit, but not too much, and not for too long.

Once you know that a fair rate is for you, compare that rate to your current rate. If there’s a large difference in the rates, you may need to refinance, although this isn’t always necessary if you’re willing to sit down with your lender.

If you show some lenders the rates you’re being offered, they may be inclined to match the lower rates you’ve gotten to keep your business. If they don’t decide to match your rate, you’ll need to refinance.

On the other hand, if the rates you are offered are similar to what you have on your loan, you’re ready for step 2.

Step 2: The hard stuff you won’t want to do (because it’s not a hack)

Now all you have to do is pay more than just your monthly payment.

That’s it. Paying off the loan early will save you a boatload on interest. Let’s revisit our Corolla from earlier so I can show you just how much.

For reference:

We’ll assume your planning on putting down $2,000 dollars, with no trade in, and are planning on taking out a standard 5 year car loan for the Corolla you’re buying.

Which means:

  1. New Corolla Amount Financed: $35,000
  2. Used Corolla Amount Financed: $18,200

Now, let’s see how much you save if you pay both of these off in 30 months instead of 60.

Credit ScoreNew Car Interest Paid (60 Months)New Car Interest Paid (30 Months)Used Car Interest Paid (60 Months)Used Car Interest Paid (30 Months)
Deep Subprime (300 to 500)$14,136$6,809$10,616$5,024
Subprime (501 to 600)$11,195$5,443$8,869$4,235
Non-Prime (601 to 660)$7,130$3,517$5,461$2,661
Prime (661 to 780)$4,390$2,188$2,988$1,482
Super Prime (781 to 850)$3,504$1,753$2,123$1,060

Get serious about paying your loans off and you’ll be rewarded with massive savings, no matter what your credit rate is. Saving somewhere between $1,000 and $7,000 dollars sounds good to me.

Of course, you don’t have to cut your loan in half. Even putting a little bit of extra into it here and there can make a big difference in terms of the amount of interest you pay.

So get serious. It pays.

Option 2: Refinance Your Car Loan

The big bad refinance is normally what most people think of when it comes to lowering your car loan’s interest rate.

Refinancing is the right option if you’ve seen a major improvement to your credit score, or if the market rates have dropped dramatically. There have already been so many greate guides written about refinancing, so I’m only going to cover the basics here.

The key with refinancing is you want to have good credit. Ideally, you’ll want to shoot for something above 660, but if you can get to 740 or higher, you’ll be qualified for better rates.

To check your credit you can use a free service like annualcreditreport.com, which allows you to check your scores for free once every 12 months. You can also use a tool like CreditKarma, however you should be aware that their VantageScore isn’t always the same as the FICO score most lenders use.

Once you know what your credit score is, check to make sure there’s no pre-payment pentalty for paying your loan off early. Assuming there isn’t, and your credit score is in good shape, here’s what you need to do.

1: To Refiance, You Want To Have Equity In Your Vehicle

Your first step is to figure out if you have equity in your car. If you don’t have equity, you’ll want to wait until you do to refiance your loan.

To calculate if you have equity, figure out the total amount you still owe on your current loan and then subtract it from what the car is worth according to a vehicle price guide like the Kelly Blue Book (KBB).

If you find out you owe more than the car is worth, you are underwater on your loan and refinancing isn’t the right idea at this time. If this is the case, use option 1 until you have equity in your car and then you can refinance.

2: Get Your Documents Organized And Ready To Go

Save yourself some time now, and pull all of the required documents before you go through the refinancing process.

Trust me, you’ll save so much time. There’s nothing worse than having to get everything together multiple times. To apply for new auto loans, you’ll need to have:

  • Proof of identity through an ID or passport
  • Your credit report, which the lender can pull using your name, address, date of birth and social security number
  • A valid state-issued driver’s license
  • Proof of monthly income through pay stubs or social security income receipts
  • Proof of residence through mortgage statements or utility bills
  • Contact information for personal references (note: this may not be required)
  • Vehicle make and model
  • Vehicle VIN
  • Proof of car insurance
  • Payment type (cash, credit, debit, etc.)

Get all of these together ahead of time and then…

3: Shop Around & Get Some Options For Car Loans

Like we talked about before, the best practice is to apply for at least 3 different loan options before making a decision. The more you apply, the better chance that you won’t be stuck paying a bad rate.

You can start with online services to get a quote, like CarsDirect, LendingClub, or even where you do your banking. You should also mix in local credit unions and banks as well to make sure you get the best rate.

The best way to apply for new financing is all at once. Meaning if you have 6 potential places you want to apply for credit, you should apply for them all within a few days, instead of over the course of a month or two.

The reason? Your credit score.

According to Experian:

If you’re shopping for a new auto or mortgage loan or a new utility provider, the multiple inquiries are generally counted as one inquiry for a given period of time. The period of time may vary depending on the credit scoring model used, but it’s typically from 14 to 45 days. This allows you to check different lenders and find out the best loan terms for you.

All new auto or mortgage loan or utility inquiries will show on your credit report; however, only one of the inquiries within a specified window of time will impact your credit score.

Once you’ve found the right lender, then you’ll need to go through the application process, which includes transfering the title to the new lender. The good news is most lenders will do this automatically for you. Less work is always a win in my book.

5: Before You Apply, Find Out If You’re Going To Save

If you don’t have a lot of time left on your loan, or the rates you’re getting aren’t much different from what you already have, refinancing may not save you a lot of money. Per Business Insider:

How far along are you in your car loan repayment schedule? If you only have a year or two left, you may be better off just sticking with your original loan. 

Extending your loan repayment period can lower your monthly payments. But when you add in the extra money you’ll pay in interest charges, you may end up paying a lot more overall. 

On the other hand, refinancing into a shorter repayment term could be a really good idea. Shorter terms tend to unlock lower interest rates. Your monthly payment will probably go up with a shorter term, but if you qualify for a much better interest rate than what you have now, it may not rise as much as you’d think. And you could save a ton of money overall.

Option 3: If You Have Equity, Trade It In For Something New

Generally speaking, I only really reccomend this option if your car is depreicating fast. Generally speaking, this applies most to luxury vehicles, as well as some electric cars like the Nissan Leaf.

With luxury cars especially, many of them are leased which has the market constantly primed with 3 year old used cars, which drives down the value. If you happen to have a luxury car with equity and you’re looking to lower your interest rate, trading it in can make sense, especially while the value is still high.

Autoblog recently did a study on the top 10 fastest depreciating cars and here’s what they found in order:

ModelAverage 3-Year-Old Used Price% Depriciation In 3 Years
Audi A6$27,89055.8%
Mercedes-Benz E Class$31,45455.4%
Ford Fusion Hyrbid$13,56554.9%
BMW 3 Series$22,71853.4%
Volvo S60$19,70253.2%
Lincoln MKZ$21,51751.8%
Infinity Q50$23,14051.8%
BMW 4 Series$26,99851.7%
Infinity QX60$25,96751%
Audi A4$22,41351%

Let’s do some simple math really quick.

Find the KBB value of your car, which you can do by searching for your vehicle’s make and model. Once you have that, subtract the fair market value of your car from the amount you still owe on your loan.

If the amount that comes out is positive, congratulations! You’ve got something called positive equity, and it can help you get out of your crazy rate.

In my opinion, if you’re trying to get out of a high interest rate loan, you’re probably all about saving money, aren’t you?

Trading in your car for a newer car can help you lower your loan’s interest rate, but that new car also has the potential to be more expensive in the long run.

So be smart about which car you choose.

Just because you can trade into something new with a low monthly payment doesn’t mean you’re saving money. Sure, you might be saving a little bit on your monthly payment, but over the years as you pay off your new loan you’ll end up paying more.

Those are dollars you could be investing, or using on other things.

So if you do plan on trading in your car, try to trade it for something more modest. For example, if the Toyota Corolla that you bought earlier is worth 20k, see if you can get a car that’s worth about $10,000.

You’ll end up saving a lot more cash that way.

But if you really want to save money…

The Best Way To Get Out Of A High Interest Car Loan Is To Get Rid Of The Car!

I’ve been a mechanic for over 20 years, and one of the areas where I constantly see people getting into trouble is by buying more car then they can afford.

According to Experian, the average car payment is getting absolutely out of control. The average car payment for a new car is $554 a month, while the average used car payment comes in at $391.

As a whole, the US now holds over $1.2 trillion dollars in automotive loans – which no one really wants to talk about.

By the way, the total US student loan debt? Only $1.5 trillion.

So let me level with you as someone who was also seduced by “low payments” and “all applications approved” auto financing.

It’s a predatory cycle, and it feeds on our insecurities. We’re always told by society that we need to have bigger and better to “flex” for the gram, or to impress your friends and family.

But what are you really buying? The stress of making that ridiculously high car payment? Or the pressure of knowing your insurance bill will easily be over $200 dollars? Or even worse, the creeping knowlege that the $50,000 you spent on that luxury car will only be worth about $23,000 in 3 years?

Let me be clear with you: cars are NOT an asset. They are a liability.

The best way to get out of a high interest car loan is to either sell the car, or trade it in if you can get enough for it to cover the cost of your loan so you aren’t underwater – where you owe more than the car is worth.

I know most of you aren’t going to do this, even though your car payment is killing you.

But it’s still the best way to get out of a high interest car loan.

Just make sure when you get your next car you get something you can afford. As a general rule of thumb, your car payment shouldn’t be any more than 10-15% of your total take home pay each month. This will keep you from buying more car than you can afford and ending up in a situation where you need to read this article.

So yeah. Ditch the expensive car. Get a reliable used car. Save your money.

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