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.
Typical credit scores usually fall 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.
While it won’t differ much from a typical credit score, FICO uses a different set of standards and 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.
While this is not as accurate as the credit score used by those in the auto industry, it gives you a close approximation of the average interest rate when purchasing a car.
Credit scores range 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|
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%.
What Lenders Look at Other Than Credit Score
Credit scores have the most impact on auto loan rates, but lenders also consider other factors.
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.
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 Pre-Approved for a Car Loan Can Lower Your Rate
Getting pre-approved 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.
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.
Getting pre-approved for an auto loan also gives you leverage when negotiating the price at the dealership. 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.
Not only will you likely get a lower auto loan rate, but the amount of the car loan could be cheaper because 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.
How can you get a low auto loan rate if you have 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.
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. Also, 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.
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 can likely not 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 out a better rate. It could lead to significant savings in your interest rate.