Auto Loans

5 Ways to Get a Smaller Car Loan

According to Experian’s State of the Automotive Finance Market survey from the fourth quarter of 2019, the average new car loan came out to $32,797 with an average monthly payment of $554. Meanwhile, the average amount borrowed for a used car was $20,554 with an average payment of $393. The average length of these loans was 69 months and 65 months, respectively.

These huge numbers highlight just how expensive buying — and financing — a car can be. To avoid a large monthly payment you can barely afford, however, it’s crucial to minimize the amount you borrow as much as you can. While the car-buying process looks different for everyone, here is our list of five ways to get a smaller car loan:

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

1. Save up a large down payment

The easiest way to get a smaller car loan is to save up as much as you can right away. With a large down payment, you can borrow less whether you buy a new or used car. You can also pay all of your lender fees and taxes out-of-pocket, reducing the amount of your loan.

Saving up a huge down payment isn’t difficult; it just takes time. By and large, one of the best ways to start saving is to 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 might be in the end. If you’d like some budgeting help, here are some of the best budgeting apps we reviewed.

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 and your LTV would be 76%.

You can read more about bad credit car loans here.

2. Buy used, especially from an independent seller

The Experian study noted a disparity between the average car loan for new cars and used cars: a difference of $12,243. 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 can skip the dealership altogether. Buying from a private seller typically means lower prices, according to industry guide Kelley Blue Book. 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. Here’s how to buy a car on Craigslist.

Consider a personal loan

Some lenders don’t offer private-party auto loans, but even if they do, 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, Capital One only offers auto financing when you purchase a vehicle from an approved dealer and borrow a minimum amount of $4,000. If the car you want to buy costs less than the lender’s minimum amount and you can’t afford to pay cash, a small personal loan might be a good option. Here’s more on auto loans versus personal loans.

3. Shop around for YOUR best loan and interest 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 interest rate, you could also score a lower monthly payment that could make your new car loan easier to handle over the long run.

A car loan calculator can help you estimate out 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. Here’s how.

Apply for a preapproved car loan

You don’t have to know the exact car you want to get in order to get an auto loan preapproval, but you do have to 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 you may get 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 monthly payment they can get. For others, a loan with the shortest term possible is ideal, regardless of the monthly cost.

Either way, it can pay to play around with your loan details to find your best loan length and deal. Shortening the length of your loan can help you pay off your loan faster and potentially get a lower interest rate, while lengthening your loan could lead to a lower monthly payment you can easily afford.

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 an auto includes special features. These features, which can include upgraded stereo systems, Apple CarPlay/Android Auto technology, 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.

Is a smaller car loan worth it?

Buying a car is never cheap, but you can decrease your car loan 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.

Jenn Jones contributed to this article.


Compare Auto Loan Offers