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5 Ways to Get a Smaller Car Loan

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A small car loan may seem impossible when prices and payments are on the rise. According to Experian’s State of the Automotive Finance Market survey from the last quarter of 2021, the average new car loan came out to $39,721 with an average monthly payment of $644. Meanwhile, the average amount borrowed for a used car was $27,291 with an average payment of $488. The average length of these loans was 70 months and 67 months, respectively.

These huge numbers highlight just how expensive buying — and financing — a car can be. While the car-buying process looks different for everyone, it is possible to get an auto loan for less by using these five strategies:

  1. Save up a large down payment
  2. Buy used, especially from an independent seller
  3. Shop around for a lower rate
  4. Consider extending — or shortening — the length of your loan
  5. Get a basic model and forgo all the ‘extras’

5 ways to get a small car loan

Buying a car is never cheap — in fact, auto loan debt is the third largest debt category for Americans, behind mortgages and student loans. However, you can decrease your costs tremendously if you’re willing to compromise. By buying used, choosing a less fancy car, saving up a large down payment and shopping around for your best deal, a smaller car loan could be in your future.

1. Save up a large down payment

The clearest way to get a small car loan is to save up as much as you can as soon as you can. With a large down payment, you’ll borrow less and possibly leave room to pay all of your dealer fees and taxes out of pocket instead of rolling them into your auto loan. Aim for a 20% down payment if possible.

How to save for a down payment

A 20% down payment may be out of reach, especially if you need a new car now, but even a small amount shows the lender you’re committed. If you don’t need a car right away, figure out how much you can spare from your monthly budget, then set up automatic bank transfers into a targeted savings account.

If you can manage to save $100 per month, you’ll have $1,200 after your first year. Save $200 per month, and you’ll have $2,400 saved after 12 months. The more you can save, the smaller your car loan will be in the end. If you’d like some in-depth guidance, here’s how to use a budget to pay off debt.

A large down payment could help those with bad credit

A large down payment may also help you get approved when you might otherwise get turned down. An important factor lenders consider is your loan-to-value (LTV) ratio. If you borrow less than what the car is worth because you make a large down payment, then your LTV is lower, which is good.

Example: If the car you want is $10,000 and you saved $2,400 for a down payment, then you would only borrow $7,600. This reduces the lender’s risk, increasing the chances it will consider that bad credit car loan.

2. Buy used, especially from an independent seller

The Experian study noted a disparity between the average amount borrowed for new cars and used cars: a difference of $12,430. If you want to borrow less, the study illustrates that you can do so by buying a used car instead of a new one.

This is especially true if you buy from a private seller where car values are lower than the dealership. In other words, don’t discount Craigslist, eBay or your neighbor with the attractive used car for sale in their driveway. If you do your research, inspect the car and settle on a fair price, you could save big and get a smaller car loan in the process.

Private-party auto loans

You’ll need a private-party auto loan to buy a car from an independent seller. Not all lenders offer them and those that do might charge slightly higher interest rates than other types of used auto loans. That’s because lenders consider private deals to be riskier investments than dealership sales. But by scoring a lower price, it could still be a money-saving arrangement for you if you do your used car research and shop around for the best car loan.

Consider a personal loan instead

Most lenders have a minimum amount you must borrow in order to take out a car loan, which may exclude that inexpensive car you have in mind. For example, Bank of America auto loans start at $7,500. If the car you want to buy costs less than the lender’s minimum loan amount and you can’t afford to pay cash, a small personal loan might be a good alternative.

3. Shop around for a lower rate

While securing a lower interest rate won’t lead to a smaller car loan, it could reduce the amount of money you pay for your loan over time. With a lower APR comes a lower monthly payment that might make your new car loan easier to handle over the long run.

A car loan calculator can help you estimate how much your payment will be based on various interest rates and loan terms. Make sure to play around with the numbers based on your credit score, then apply for an auto loan before you go to the car dealership. Here’s why: Dealers can — and often do — raise customers’ auto loan interest rates for their own profit. One of the best ways to make sure you receive the car loan APR you deserve is to get a preapproved car loan.

Apply for a pre approved car loan online

You don’t have to know the exact car you want to get in order to get an auto loan preapproval, but you should have an idea of how much you want to borrow and for how long. Then when you’re ready to shop, fill out an online form at LendingTree and receive up to five auto loan offers from lenders, depending on your creditworthiness.

4. Consider extending — or shortening — the length of your loan

A smaller car loan can mean different things to different people. For some, their main goal is securing the lowest possible monthly payment. For others, a loan with the shortest term possible is ideal, regardless of the monthly cost.

Shortening the length of your loan can help you pay off your loan faster and potentially get a lower interest rate. Lengthening your loan could lead to a lower monthly payment you can easily afford but might raise the total cost of borrowing.

5. Get a basic model and forgo all the ‘extras’

While all new and used cars come with a base price, the costs can skyrocket when a car includes special features. These features, which can include upgraded stereo systems, leather interiors and more, tend to add to the overall cost of your vehicle without increasing its utility.

To get the smallest car loan possible, it helps to search for automobiles that don’t include all the pricey extras and add-ons. Remember, you can customize certain components of your car later on when you can afford it.

Jenn Jones contributed to this article.


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