Your credit score is the most important factor in determining the interest rate you're charged on auto loans. You can know what you might qualify for and if you're getting a good deal on your auto loan once you're familiar with the average car loan interest rate by credit score.
Here you will learn more about typical auto loan rates and how to negotiate a lower rate.
The table below gives you the average interest rates for new and used car loans based on your credit score.
| Credit Score | Average interest rate for new car loans | Average interest rate for used car loans |
|---|---|---|
| 781 to 850 | 3.46% | 4.18% |
| 661 to 780 | 4.53% | 6.03% |
| 601 to 660 | 7.07% | 10.83% |
| 501 to 600 | 10.45% | 17.35% |
| 300 to 500 | 13.34% | 20.93% |
When you shop around, you can find that the interest rates that different lenders charge vary. The auto loan interest rates are charged based on your ability to repay your loan. Interest rates tend to increase if the risk associated with loans is high.
The different factors that affect loan interest rates are mentioned below:
If you have a good credit score, the interest rates will be low when compared to that when the credit score is low.
Your credit score plays an important part in your credit history, but it also includes information about whether you have missed any monthly payments. If you have missed out on any, lenders use it to charge high-interest rates.
The prevailing market rate heavily influences the rates you are offered. When the average interest rate rises, lenders respond by charging more to borrow money; thus, the interest rate you pay may increase.
For longer loan terms, the interest rate will be high, and the monthly payments will be low. On the other hand, interest rates will be lower for shorter loan terms, and the monthly payment will be higher.
How much of a vehicle's worth was borrowed can be indicated by calculating the LTV ratio. A lower loan-to-value ratio (LTV) usually means a more manageable interest rate.
The debt-to-income ratio measures how much a person's monthly gross income is committed to debt service. Lenders will consider your debt and your DTI ratio when determining whether or not they will extend your credit. Having a lower debt-to-income ratio gives you better chances of getting a cheap interest rate on your car loan.
Through a larger down payment, you can build your trust with the lender, who will then be ready to offer you the loan at a lower interest rate.
Lenders' credit underwriting standards might vary widely. Credit is just one factor; how much debt you have in relation to your salary will also be evaluated. Some may give more weight to your education and/or professional experience. Some lenders offer more competitive rates even without considering these factors.
The total loan amount will be based on the vehicle's price and your down payment. Lenders may assess you as a higher risk if you are unwilling to make a big down payment than is necessary, in which case they may increase your interest rate.
Loan rates vary based on the vehicle's age, mileage, and overall condition. Loan rates are greater for automobiles with higher mileage or poorer condition.
Lenders use credit ratings to gauge the likelihood that borrowers will repay debts on time and in full. The factors that affect your credit score and that influence your lender:
It is based on the payment history that the lenders get an idea about how much they can trust you about paying back the loan.
You should expect your credit score to be affected by the total amount of money you owe to other creditors. Lenders consider your overall debt and debt-to-credit ratio when making lending decisions.
The time you've kept credit card and loan accounts open also plays a role in your credit rating. Having several years old accounts with a history of timely payments will help your credit score.
People usually don't give much thought to the notion that hard inquiries into their credit can have a negative impact on their scores. When a business requests your credit report, it is considered a hard inquiry and might temporarily reduce your score.
As a result, you should limit your car shopping to no more than two weeks, which will typically only manifest as a single rigorous inquiry. The damage from a hard inquiry to your credit score may be mitigated in this way.
Not all lenders have the same interest rates on auto loans based on credit scores. You might discover a variety of interest rates if you shop around for a vehicle loan, so it is recommended to look at these interest rates. Depending on your financial situation, you may find that some loan providers provide more favorable terms than others.
Here are the different options you can look for.
You can approach banks for both new and used car loans. If you already have an account in a certain bank, the loan processing will be easier, and there are chances that you will get these loans at a lower interest rate. They offer preapproved auto loans and refinance auto loans, making financing easier.
In the same way that banks do, credit unions will often finance or refinance purchasing a new or pre-owned car. A credit union's financial services are available only to its members. While credit union membership requirements may differ, the application process is typically straightforward. Credit unions are beneficial to join since they mostly grant loans to borrowers with poor credit at lower interest rates.
Online lenders will also provide you with auto loans at different interest rates.
The best auto loan rates can often be found through local car dealerships. You'll have a hard time finding 0% financing elsewhere, and even then, it's limited to those with excellent credit. Some car dealerships indeed have higher interest rates than the market average. It will be easier to deal with the dealership if you know what rates to expect and don't let yourself get worn down.
If you want to know the loan offers from different lenders, lending marketplaces are the right place. Here you can find the lowest rates based on your credit score.
It might seem that the interest rate for your loan based on your credit score is high. If you are looking for techniques to lower the rate, here are some.
Shop around for an auto loan and compare the interest rates offered by different lenders. Choose the one that best suits your financial situation.
If you want to make sure you get the best rate, it's best to get preapproved by many lenders. Some quotes may involve a hard credit check, but most just need basic information about you and your employment history. You should limit your application window to around two weeks because some require a hard pull.
The interest you will have to pay overtime gets reduced by making a large down payment. It also reduces the loan term.
You can qualify for a lower auto loan rate if you have a co-signer. This is because you are not solely responsible for paying back the loan. If the person you approach to co-sign a loan with you also has a strong credit history, you'll be considered a less risky borrower.
Another choice is to refinance your car loan. A higher interest rate loan taken out today can be refinanced for a lower rate after a period of on-time payments, depending on variables such as the borrower's creditworthiness. While you may have to make greater payments initially, you will save money in the long run.
Use an auto loan calculator on the lender's website to obtain an idea of the interest rate you can expect before applying for approval or preapproval. Knowing the car's value, your desired down payment and the loan term are all essential information. If you know roughly what your credit score is, you can check vehicle loan rates before applying.
The interest rates for used car loans are higher than for new ones. If you feel that the interest rates are too high, you can choose a different car. If you want a used car, go for the one with low mileage, as it has a lower interest rate.
Your credit score and the average interest rate for auto loans will determine the loan terms for which you are eligible, but our car payment calculator will give you an idea of how much you may expect to spend each month.
Long-term loans typically carry a higher interest rate than their shorter-term counterparts. Get quotes from several financial institutions and compare them to choose the best one for your needs.
You may be eligible to refinance for a lower rate and payment if you already have a car loan, but your interest rate is greater than the average rate stated for your credit score. Apply to multiple financial institutions to refinance your car loan to compare rates.
The auto loan interest rates vary based on the lenders. They fix Interest rates on cars based on credit score, which will not be the same for all. You can improve your credit score by making on-time payments without skipping any month. With a good credit score, banks, online lenders, car dealerships, and credit unions are ready to offer you loans.
A credit score of 700 places you in the "prime" category for borrowing. Experian reports that the average rate for new auto loans is 4.01%, and the average for used car loans is 5.88%.
You'll qualify for the best auto loan rates if your credit score is at least 640, putting you in the "near prime" borrower category. You may be able to acquire a car loan, but you won't get the greatest interest rates.
The higher your FICO score, the more likely you will get approved for a loan, and the cheaper your interest rate will be. However, some lending companies are willing to work with borrowers with poor credit, and even companies that focus specifically on auto loans for those with bad credit. High-interest rates are to be expected if your FICO score is poor.
To qualify as a "near prime" borrower, your credit score must be at or above 620. As per the Experian report, new automobile loan interest rates for this group average 6.57%, while used car loan interest rates average 10.3%.