If you're thinking about financing your next car, you're probably considering the interest rate. An interest rate is one of the most important aspects of buying a car because it determines just how much you'll wind up paying: A high rate means you might be overpaying, while a low rate often means that borrowing is an excellent idea. How can you get a lower rate when you're buying your next car? We have some ideas.

Shorter Loan Term

One of the easiest ways to improve your interest rate is to sign up for a shorter-term loan. For instance, while you might find that your bank is offering a 6 percent rate for 60 months, the rate may drop to 3 percent if you're willing to finance over 36 months -- or it could climb to 8 percent if you choose a 72-month loan term.

Lenders prefer shorter-term loans because it means they'll be paid back sooner. As a result, they offer a lower interest rate as an incentive to choose a short-term loan. Unfortunately, a shorter-term loan has a catch: Your monthly payments will probably go up, even though your interest rate will go down, because you're stretching out your loan payoff over a shorter period of time.

More Money Down

Lenders are often willing to give you a better interest rate if you increase your down payment. For example, although your rate might be 9 percent with nothing down on a $10,000 car, it may drop to 6 percent if you're willing to put down $3,000.

The reason for this practice is that you're less likely to be upside down on a loan (meaning that you owe more than the car is worth) if you put down a higher amount. In turn, this means there's less risk for the lender, so you'll get a better rate as an incentive to put down even more money.

Of course, this also has a catch: While you'll get a better interest rate, you'll have to spend more money up front in order to do so. This isn't always feasible for some shoppers, and others would rather not put down a large amount of money when buying a car.

Buy a Newer Car

Interestingly, you'll often find that buying a newer car will help improve your interest rate. Choose a 2004 model, and you might end up with a 12 percent rate, while a 2014 model may come with a 2 or 3 percent interest rate from an automaker.

There are several reasons that this is the case, but the primary one is that a lender takes on more risk when you choose an older car. An older car's value is more difficult to know -- and its future value is even more difficult to predict. This means lenders take on extra risk when issuing a loan on an older model.

Of course, if you prefer an older model -- or if you can't afford a newer one -- this advice isn't likely to help you improve your rate. But if you're looking for the best possible interest rate, choosing a newer car will likely help you get there.

author photo

Doug DeMuro has a wide range of automotive industry experience, from work at a Ferrari dealership to a manager for Porsche North America. A lifelong car enthusiast, Doug's eclectic vehicle purchases include a Porsche 911 Turbo, an E63 AMG wagon, an old Range Rover and a Mercedes Benz G-wagen.

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