You can use a car loan to finance your car. Like any other loan option, you will have to pay interest on your loan every month. The average interest rate on car loans can range quite a bit between 2% to 20% depending on some factors. Continue reading to learn more about what these factors are. You will also find more information on car loans in general.
What Determines Specific Auto Loan Rates
Your specific interest rate on your car loan will depend on a few factors, including your income and your credit score. Your credit score is a number that defines your credit history. It is something that lenders look at heavily to determine your interest rate. The most popular credit scoring model is a FICO score; most lenders will see that when they conduct a credit check.
A FICO score model ranges between 300 to 850, and there are different tiers. Here is a breakdown of those tiers:
- 300 to 579 — A poor credit score.
- 580 to 669 — A fair credit score.
- 670 to 739 — A good credit score.
- 740 to 799 — A great credit score
- 800 to 850 — An excellent score.
The better your credit score, the closer your interest rate will likely be to the 2% interest rate. While a poor credit score will mean an interest rate closer to the 20% range.
Below are some of the average ranges for interest rates based on your credit score tier. The first percentage average is for a new car while the second is for a used one:
An Excellent Score — 2.47% and 3.61%.
A Great Score — 3.51% and 5.38%.
A Good Credit Score — 6.07% and 9.8%.
A Fair Credit Score — 9.41% and 15.96%.
A Bad Credit Score — 12.53% and 19.87%
As you can see, the interest rate for a new car will be a little less than for a used car. However, a new car will likely cost hundreds or thousands more than a used car of the same make and model.
How To Get the Best Auto Loan Interest Rates
If you have a poor or average credit score, you may be curious about what you can do to get the best interest rates. Here are some solutions:
Get a Cosigner or Co-borrower
Adding a co-signer or co-applicant with a good credit score and adequate income can help you get a lower interest rate on a car loan. Remember that a cosigner is not initially responsible for paying for the loan, while a co-borrower will help you with your monthly payments. It is also important to remember that by asking someone to be a cosigner or co-borrower, your credit score and the other person’s score will be affected by each other’s actions. And so, this is not a decision to take lightly.
Try and Improve Your Credit Score
Another thing you can do to lower your car loan interest rate is to improve your credit score. Here are some things you can do to help increase your score:
Pay Your Bills on Time
The most important thing you can do for your credit history is to pay your bills on time. Your payment history makes up 35% of your credit score, the highest percentage of any other variable. And so, even one late payment could hurt your credit score.
Avoid Hard Credit Inquiries
A single hard inquiry can take down your credit score by up to five points, so it is best advised to avoid multiple credit inquiries in a short time.
Avoid New Debt
Another important factor that impacts your credit score is your credit utilization ratio. This measures the amount of debt you have against your available credit. If your credit utilization goes over 30% it can hurt your credit score. And so, try and avoid new debt if possible. You should also try and pay off existing debt if possible!
Review Your Credit Report
It is imperative that you review all three of your credit reports often and correct any errors or inconsistencies there. Mistakes there can bring down your credit score, and you should fix them asap.
Make the Most of Your Thin Credit Profile
If you have a thin credit profile, you can do things like getting your rent and utility payments reported to help increase your credit standing. Services like Experian Boost can help with that. Or you can get those types of payments reported on your own.
Fixing your credit scores will take some time and effort, but that time and effort will definitely pay off if you can manage it. Your average interest rates will get significantly lower the higher your credit score goes.
Look at Multiple Lenders
Every car loan lender works differently, including differences in their average auto loan rates. And so, to find the best interest rate for your specific financial situation, it will be helpful to look around at different lenders. You can find auto loans with traditional financial institutions like banks and credit unions. You should also look at private lenders and car dealerships.
What Other Factors You Must Pay Attention to With Auto Loans
Interest rates are definitely important with any loan. However, it is not the only thing you should pay attention to. Here are some other factors you should consider before choosing a loan option:
The Loan Term
How long or short a loan is essential to think about. The longer your loan is, the lower your monthly payments will be, but the more interest you will pay. While a short loan will mean a higher monthly payment but less interest over time. You will want to work with a lender that fits that sweet spot of an affordable monthly payment and not paying more interest over the loan’s life than you have to.
Early Payment Penalties
Some lenders offer the ability to make early payments without any penalties, while others don’t. Having this flexibility can be extremely helpful.
The Lender Themselves
Another thing to pay attention to is the lender. Some lenders are more flexible than others, and so, before choosing one to work with, it will be essential to do some research on them. Check out past customer reviews and check for any consumer complaints.
The Monthly Payment
Your monthly payment on your loan will encompass everything from your principal balance and interest. Although looking at interest rates is important, you should also consider your monthly payment. The good news is that many car loan lenders will provide borrowers with estimates with pre-approval and so you can use that information to calculate your monthly loan payment. You can use an auto loan calculator to make things simple.
Making the Best Out of Your Car Loan
When you are ready to take out an auto loan, whether an online or an in-person loan, there are a few things you can do before and after to make the most out of financing your car. Here are some tips:
Have At least 10% or 20% For a Down Payment
If you are buying a used car, you should have at least 10% down; for a brand new car, you should have 20% down. Having enough for a down payment on your car loan will help alleviate some of the debt of financing a vehicle.
Set up Automatic Payments for Your Car Loan
One of the most detrimental things you can do to your credit score is late payments on a loan. And because auto loans are secured loans, missing multiple payments can mean repossession of the car. To ensure you make your payments on time, it will be wise to set up automatic payments.
Communicate With Your Lender if Your Finances Change
If, at any time during loan payment, your finances change, it is imperative that you communicate with your lender. Clear and open communication can help you work with your lender rather than have things blow up. Most lenders are accommodating with borrowers if their financial situation changes and may offer things like extensions or a lower monthly payment for some time. Just make sure to be open and honest as soon as you can with them.
Wait for Positive Equity To Sell
Once you have your car and are paying back your loan, it is essential that you wait for positive equity before you decide to sell it or trade it in.
Know That You Can Refinance a Car Loan
If your car loan is unmanageable, know that you may be able to refinance it! Refinancing involves taking out a new loan (which does not have to be another auto loan) to pay off the existing loan. By doing this, you will then have different loan terms and sometimes a new lender. When refinancing with bad credit you will want to stay away from loan options like payday loans or car title loans, as they can be more expensive.
Key Takeaways With Interest Rates for Auto Loans
Auto loan interest rates will range between 2% to 20%. Your specific auto loan rate will largely depend on your credit score and the lender you choose to work with. The best thing you can do as a borrower is to improve your credit score before you apply for financing. Also, remember that interest isn’t the only factor you should consider with an auto loan; the lender and repayment terms are all equally important.
References:
Auto Loan Interest Rates By Credit Score (August 2022) | Market Watch
