When buying a new or used car, your interest rate can significantly affect your monthly payments. But, what factors determine your interest rate, and how can you be sure that you’re getting the best interest rate for your new car?
How Your Credit Score Affects Car Loan Interest Rates
The biggest factor in determining your interest rate is your credit score. However, the credit score used by banks and credit unions for an auto loan can be different from the one you see from a third-party credit score provider. In addition, it can vary per lender, and lenders can score you differently depending on the financial product or service you require.
A typical credit score usually falls between a range of 300 to 850. The higher the number, the better your credit. You can purchase your FICO scores directly from FICO.
What is a FICO Auto Score?
The FICO Auto Industry Option is a credit score specifically marketed and sold to the automobile industry to determine your creditworthiness when purchasing a vehicle. It’s an industry-specific credit score used by the majority of auto lenders. FICO Auto Scores are available only to those in the auto industry. Consumers cannot purchase them.
A typical score ranges from 300 to 850, but a FICO Auto Score ranges from 250 to 900. While it’s impossible to know exactly what criteria FICO uses, Auto Scores weigh your credit history differently than the average credit score. It determines, with more accuracy, your likelihood to repay a car loan.
The FICO score isn’t much different from a typical credit score, but it is based on different standards. It focuses more on your ability to repay a car loan than, say, a mortgage or credit card.
If you have excellent credit, the FICO Auto Score won’t matter much when determining your rate. However, if you have average or poor credit, minor differences can make a big difference when lenders determine your interest rate.
Average Auto Loan Rates by Credit Score
Because FICO doesn’t share or sell the FICO Auto Score to consumers, it’s only possible to show the average auto loan rates using a typical credit score.
It’s not as accurate as the credit score used by those in the auto industry. However, it gives you a close approximation of the average interest rate when purchasing a car.
The FICO credit score range is from 300 to 850, and auto loan rates are slightly higher if you purchase a new car versus a used car. Below are the average auto loan rates for new and used cars based on each credit score range and a 20% trade-in or down payment.
| CREDIT SCORE | AVERAGE NEW CAR APR | AVERAGE USED CAR APR |
|---|---|---|
| 781-850 | 2.96% | 3.68% |
| 661-780 | 4.03% | 5.53% |
| 601-660 | 6.57% | 10.33% |
| 501-600 | 9.75% | 16.85% |
| 300-500 | 12.84% | 20.43% |
As you can see, your credit score can have a major impact on your interest rate when purchasing both new and used cars.
Those with very good credit, or “well-qualified buyers,” will have lower interest rates than those with average to poor credit scores. For instance, those with a credit score in the 601 to 660 range will pay close to 5% less than those in the lower bracket.
Used cars will have a higher rate because they are more likely to have mechanical issues or go underwater (they become less valuable than the amount of the car loan).
Keep in mind that these are averages, and actual rates will vary. The lowest right now for a new car is about 1.74%. The highest for a new car can hover around 24.9%.
Get Prequalified for an Auto Loan With Great Rates
Carvana
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Loan Term12 to 72 months
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APR3.90 – 27.90%
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Minimum Credit Score450
Carvana’s unique value proposition is that you can get a car loan, choose a vehicle, and buy a car all in one place. The company has a large selection of used cars you can choose from, and there is no minimum credit score to apply.
To get started, you’ll fill out a quick survey of what you’re looking for in a car. Carvana will then match you to several vehicles.
Once you’ve chosen a vehicle, they’ll run a soft pull on your credit to preapprove you for an auto loan. Once you finalize the loan application, Carvana will do a hard pull on your credit.
Other Factors Lenders Consider Besides Credit Scores
Credit scores have the most impact on auto loan rates, but lenders also consider other factors.
Down Payment
The amount of a down payment you make on a car purchase can mean the difference between being approved for an auto loan or being turned down.
However, it does not have much of an effect on the auto loan rate. If it does have any effect at all, it will be negligible. A fraction of a percent won’t have much of an impact on your monthly payments.
Loan Term
However, loan term, or loan duration, does have a measurable impact on auto loan interest rates. The shorter the car loan, the lower your annual percentage rate (APR). Typical car loans last 36, 48, or 60 months in duration. Getting a shorter 36-month loan could save you close to a full percentage point on your APR compared to a 60-month loan.
While your monthly payment will be higher with a 36-month loan, you’ll save money in the long run. You’ll pay the auto loan off faster and have a lower interest rate.
If you have more money set aside for a down payment than is necessary, consider using it to cover the difference between a longer duration auto loan and a shorter one.
Getting Preapproved for a Car Loan Can Lower Your Rate
Getting preapproved for a car loan before you set foot on the dealership lot can have several benefits. First, you can compare offers from multiple lenders ahead of time to get the best auto loan rates. Check with banks, credit unions, and online lenders.
Those savings can translate to thousands of dollars over the lifetime of the car loan. Of course, you’ll also know in advance what your car budget will be.
A preapproved auto loan also gives you leverage when negotiating the price with the dealer. Car salesmen will see you as a buyer and not just a browser.
They’ll know you’re serious about purchasing a car, and it now becomes their job to make sure you buy a car from them. This can mean receiving discounts or incentives they otherwise may have left off the table.
You will likely get a lower auto loan rate and maybe even a better deal on the car loan if the dealership gives you a price break. This lowers the total amount of your car loan and the amount of interest you pay on your vehicle.
Refinance Your Car Loan for a Better Interest Rate
Not everyone can refinance a car loan, but for those who can, it’s a much easier process than refinancing other loans such as a mortgage.
If you’re upside-down on your auto loan, that is to say, that the car is worth less than the current balance of the loan, then you likely cannot refinance. However, if that is not the case and you meet other criteria, you may want to consider refinancing.
If your credit score has improved since you made the purchase, it’s worth looking into a refinance. In addition, if interest rates have dropped since you took out your original loan, it may also be an excellent time to refinance.
Additionally, if your rate is above 6%, it can’t hurt to seek a better rate. It could lead to significant savings in your interest rate.
Frequently Asked Questions
What is the average interest rate on a car loan?
According to Experian’s State of the Automotive Finance Market report for Q2 of 2022, the average auto loan interest rate is 4.33% for new cars, and 8.62% for used cars.
What are used car loan interest rates?
Interest rates for used car loans range between 8.13% and 20.12% at the current time of this writing. Auto loan interest rates vary depending on your credit score. Borrowers with the highest credit scores qualified for just over 8% interest rates.
Where can I get the lowest interest rate on a car loan?
Interest rates are constantly changing. It’s best to shop around at numerous sites to see what their current rates are. Here are our picks for best auto loans right now.
What factors affect auto loan rates?
The most significant factors that typically affect your interest rate are as follows:
- Credit score
- Income
- Length of term
- Debt-to-income ratio
- Amount of down payment or trade-in
- Age of vehicle
- Preapproval
Can I get an auto loan with bad credit?
Auto loans typically come with higher interest rates if you have poor or average credit. However, there are some tactics you can use to reduce your interest rate or, at least, reduce the amount of interest that you pay.
See also: Auto Loans for Bad Credit
Get a Cosigner
If the option is available, consider a cosigner for your car loan. A close relationship with someone with better credit can help lower your rate and get you better terms on your loan by backing it for you. This can be a friend or family member such as a parent or spouse.
While there are benefits to having a cosigner, there are also drawbacks. The cosigner’s credit will likely take a hit from the hard inquiry on their credit report when helping you to secure a car loan. Furthermore, they’re liable for the total amount of the car loan if you default.
When you have bad credit, you may be required to provide proof of income and residency. You may also be required to pay a larger down payment. While a large down payment won’t affect your loan’s APR, your overall interest will be lower because the amount you borrow will be lower.
