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Auto lenders consider a variety of factors when determining your loan interest rate. One of the more influential factors is your credit score.
As a result, it's possible to know what a reasonable, or average, interest rate might be based on your credit score range. Knowing this before heading to a dealership or applying for a loan can give you an idea of what to expect and help you budget for a vehicle purchase. In general, higher credit scores correlate with lower auto loan rates, so understanding the potential rate you'd pay may help you determine whether it'd be better to wait and improve your credit before you apply for a loan.
What Are the Average Auto Loan Rates by Credit Score?
Experian's quarterly State of the Automotive Finance Market takes a look at the average auto loan interest rate paid by borrowers whose scores are in various credit score ranges.
As of the first quarter of 2020, borrowers with the highest credit scores were, on average, nabbing interest rates on new cars below 4%. Used car interest rates were slightly higher on average, bottoming out on average at 4.29%. Here's what you can expect from auto loan rates for new and used cars:
|Average New Car Rate||Average Used Car Rate|
|Deep subprime (579 or below)||14.39%||20.45%|
|Subprime (580 - 619)||11.92%||17.74%|
|Nonprime (620 - 659)||7.65%||11.26%|
|Prime (660 - 719)||4.68%||6.04%|
|Super prime (720 or above)||3.65%||4.29%|
Note that your interest rate can also vary if you finance a vehicle purchased through a franchise dealer versus an independent dealer. In general, franchise dealers can net you a slightly lower rate.
How Do Auto Loan Rates Work?
Auto loan interest rates are determined through risk-based pricing. If a lender determines you're more at risk of defaulting on your loan because of your credit score and other factors, it will typically charge a higher interest rate to compensate for that risk.
Factors that can impact your auto loan interest rate include:
- Credit score and history: Even if your credit score is relatively high, you may still end up with a higher interest rate if there are negative items on your credit report. Examples can include missed payments, collection accounts, repossessions and bankruptcy.
- Loan term: The longer your repayment term, the more risk it carries for the lender—both that you might default on your payments and that market interest rates may increase, making your loan less profitable than new loans. You may be able to score a lower interest rate by going with a shorter repayment term.
- Down payment: Putting more money down on your vehicle purchase not only reduces how much you owe, but also decreases the risk associated with your loan. As a result, a high down payment may result in a lower interest rate.
- New vs. used vehicle: Auto manufacturers provide many incentives for car buyers to purchase new vehicles, including lower interest rates through their financing companies. Other lenders, including banks and credit unions, may also lower their rates to compete. In contrast, if you're buying a used car, there's no incentive for lenders to offer lower rates, which results in higher rates on average.
- Income and debt: Lenders will also consider your debt-to-income ratio (DTI), or how much of your gross monthly income goes toward debt payments. A high DTI may be a sign that you can't take on any more debt without putting stress on your budget, and may result in a higher interest rate.
- The lender: Each lender has its own criteria for determining auto loan interest rates, and may have differing starting and maximum rates.
Whatever auto loan interest rate you qualify for, it'll be represented in the form of an annual percentage rate (APR), which may include the cost of both interest and fees. The lender uses your interest rate to amortize the cost of the loan. This means that you'll pay more interest at the beginning of the loan's term than at the end.
Where Can You Get the Best Auto Loan Rates?
There are several ways you can get a car loan, and some auto lenders may offer lower interest rates than others.
All franchise dealerships and many independent dealerships may offer what's called dealer-arranged financing. This means that instead of applying for a loan with lenders directly, you'll fill out a credit application at the dealership and the finance manager will shop around for you.
Dealer-arranged financing is convenient, but in some cases the rate may be higher than what you can get through a direct auto loan because it also compensates the dealer for finding the loan.
Many national and community banks offer auto loans. In some cases, you may be able to get preapproved for a bank auto loan before you ever set foot in a dealership. With some banks, though, you can only get a loan through dealer-arranged financing.
Some banks may offer loans on a national level, but they typically won't offer the best rates compared with other lenders.
In general, credit unions charge lower interest rates than banks. Because they're nonprofit organizations, they typically use the money they make to provide lower rates and fees and better services to their members.
Depending on the credit union, you may be able to apply for a loan directly, through a dealer or both. You usually have to be a member of a credit union to apply for a loan, however. So check with your local credit union to see what your options are.
Online lenders can often provide lower interest rates than banks and sometimes even credit unions because they don't have the overhead costs associated with a network of brick-and-mortar branches.
Also, online lenders will typically allow you to get preapproved before you formally apply, which can allow you to shop around and compare auto loan rates more easily.
How to Reduce Your Auto Loan Interest Rate
Improving your credit score is one of the best ways to score a lower auto loan interest rate. You can do that by checking your credit score and credit report to get an idea of which areas you need to address.
Common ways to improve your credit score include getting caught up on past-due payments, paying down credit card debt, limiting new credit applications and disputing inaccurate information on your credit report.
As you work on building your credit, here are some other ways you may be able to reduce your auto rate:
- Shop around. One of the best ways to get a lower rate on your auto loan is to compare rate offers from multiple lenders. Apply for preapproval to get rates from at least three to five lenders to get a good idea of what you're likely to qualify for.
- Apply with a cosigner. If you don't have time to improve your credit, applying with a creditworthy cosigner may improve your chances of scoring favorable terms. The lender will consider both credit profiles to determine the loan's risk and your interest rate.
- Make a larger down payment. Again, putting more money down reduces how much you owe and the loan's risk to the lender. If you can afford it, consider making a larger down payment to save money with a lower rate.
- Opt for a shorter repayment period. A shorter repayment term will result in a higher monthly payment. But if you can afford it, it could help you qualify for a lower rate on your loan and reduce your overall interest costs.
- Refinance your auto loan. While you may not qualify for a low rate right now, you can refinance your loan at a later date once your credit and financial situation has improved. Many lenders offer auto loan refinance options, allowing you to shop around to increase your odds of getting a low rate.
Consider each of these options and determine the right ones based on your situation, goals and abilities.
Maintain Good Credit for Future Auto Purchases
While improving your credit for your next car purchase can save you money in the short term, maintaining good or excellent credit can provide even more savings in the long run, on future auto purchases as well as other financing options.
Make it a goal to monitor your credit regularly to keep an eye on your credit score and the different factors that influence it. Keeping track of your credit can also help you spot potential fraud when it happens, so you can address it quickly to prevent damage to your credit score.