When buying a new or used car, your interest rate can have a big effect on your monthly payment. Most people buying a car spend hours searching for the perfect vehicle. Color, trim, and horsepower are all amenities we might obsess over.

lady buying car

Finding the perfect car takes time, research, and sometimes a little bit of luck. And while all of that planning is important, what about finding the ideal car loan?

New and used car purchases have risen steadily since 2008. More Americans are buying new cars now than at any time in the last ten years.

Sales increases, however, have fallen flat in the last couple of years, leading many experts to forecast a slump in the future. There are many reasons attributed to the slow down.

Americans are keeping their cars longer. The average car on the road today was built in 2005. Fuel efficiency, a major benefit of purchasing a new car, has continued to rise but low gas prices have largely negated this benefit.

The number of cars Americans own is shrinking. Peaking in 2006 at 2.05 cars per person, that number has dipped to 1.92, a number not seen since the early 90s.

As a result, car dealerships are decreasing production but offering more incentives. From cash rebates on last year’s model to incentives for first-time car buyers, military discounts and loyalty cash for repeat buyers, there are plenty of deals to be had.

But interest rates are determined by factors other than sales numbers. How can you be sure that you’re getting the best interest rate for your new car?

How Your Credit Score Affects Car Financing

The biggest factor in determining your interest rate is going to be your credit score. However, the credit score used by lenders for an auto loan can be different from the one you see from a third party. It can vary from company to company and you can be scored 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 score used by the majority of auto-related credit lenders. FICO Auto Scores are available only to those in the auto industry and may not be purchased by the consumer.

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 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 rate of a car loan using a typical credit score.

While this is not as accurate as the score used by those in the auto industry, it gives you a close approximation as to what your interest rate may be when purchasing a car.

Scores range from 300 to 850 and your rate will be slightly higher if you’re purchasing a new car versus a used car. Below is the average APR, for new and used vehicles 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 3.05% 3.685%
661-780 3.96% 5.42%
601-660 6.92% 10.06%
501-600 6.92% 10.06%
300-500 14.3% 19.73%

As you can see, your credit score can have a major impact on your interest rate when purchasing both new or used vehicles.

Those with very good credit, or “well-qualified buyers,” will have extremely low-interest rates compared to those with average to poor credit scores. For instance, those with a 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 loan).

Keep in mind also 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 there are other factors considered as well.

The amount of a down payment that you make on a car purchase can mean the difference between being approved for a loan or being turned down.

couple buying a car

It does not, however, 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 and won’t make a huge impact on your monthly payment.

Loan duration, however, does have a measurable impact on auto loan interest rates. The shorter the loan, the lower your APR will be. 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 obviously be higher with a 36-month loan, you’ll save money in the long run. You’ll pay the 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 cover the difference between a longer duration 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. You can shop around ahead of time for the best deals and the lowest interest rates.

Those savings can translate to thousands of dollars over the lifetime of the loan. You’ll also know in advance what your car budget will be.

Getting pre-approved for a 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 loan could be cheaper because the dealership gives you a price break. This lowers the total amount of your loan and the amount of interest you pay on your vehicle.

Lowering your interest rate doesn’t just come from getting a better APR, but can also from lowering the total amount that you pay for the car, doubling down on your savings.

How can you lower your auto loan rate if you have bad credit?

If you have poor or average credit, you’ll be paying a higher interest rate for your car than a well-qualified buyer.

However, there are some tactics you can use to reduce your interest rate or, at least, reduce the amount of interest that you pay.

If the option is available to you, consider a co-signer for your car loan. A close relation 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 drawbacks as well. The cosigner’s credit will likely take a hit when helping you to secure a car loan. Also, they’re liable for the full amount of the loan if you default.

When you have bad credit, you may be required to provide proof of income as well as 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 a mortgage.

If your loan is upside down, 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. If interest rates have dropped since you took out your original loan, it may also be a good 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.