Average Car Loan Interest Rate by Credit Score
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Auto loan interest rates vary widely from 0% to much higher interest rates, such as 25% for subprime borrowers with very poor credit. One reason why the interest rates for car financing are important is that the price of vehicles being produced today is staggering.
The average price for new cars in the U.S. recently surpassed $40,000, which also translates to pricier used cars, which then makes good car loan rates a priority. Consumers with bad credit face excessive monthly payments and will pay exorbitant amounts of interest over the loan term.
Car Loan Interest Rate by Credit Score
Credit scores represent a numerical assessment of your credit history, which ranges from 300 to 850. Auto lenders use credit scores for determining how much of a risk a prospective borrower poses.
For example, those with a low credit score of 550 represent a much larger risk compared to a consumer with a good credit score of 780.
The average auto loan rates are approximately 4.09% for new car loans and 8.66% for pre-owned vehicles. The following chart illustrates interest rates according to the average credit score.
Average Interest Rate by Credit Score
| Borrower Type | FICO Score | Auto Loan Rate (New) | Auto Loan Rate (Used) |
| Super Prime | 781 – 850 | 2.34 % | 3.66 % |
| Prime | 661 – 780 | 3.48 % | 5.49 % |
| Non-prime | 601 – 660 | 6.61 % | 10.49 % |
| Subprime | 501 – 600 | 11.03 % | 17.11 % |
| Deep Subprime | 300 – 500 | 14.59 % | 20.58 % |
Source: Business Insider Personal Finance
Can I Get an Auto Loan with Bad Credit?
While borrowers with bad credit are unlikely to qualify for any lower interest rate financing, most individuals with verifiable employment will find that multiple lenders will provide them a car loan—likely at much higher interest rates.
Experian reports that those with fair or bad credit have approximately the same number of car loans listed on their credit reports as those with excellent credit. One reason for this is that auto loans are secured loans, unlike most personal loans or unsecured credit cards.
Banks, credit unions, or other financial institutions offer secured loans for assets such as homes and cars that represent collateral. Here, if the borrower is unable to keep up with the car loan payments, the lender may repossess the vehicle as a means of recouping their losses.
Can you lease a car with bad credit? A report from Car and Driver says that typically a minimum of a 620-credit score is needed but may vary. They found that those with scores below 660 had roughly a 22% chance of qualifying for a lease.
Factors That Impact Your Auto Loan Interest Rate:
Credit Score and History
The Fair, Isaac, and Company, now simply referred to as FICO, is the leading agency that creates the model for calculating credit scores. FICO explains that payment history is the largest single factor that influences your credit score—about 35%.
Lenders prefer borrowers that have established a length of credit history that shows they are financially responsible.
Checking your credit history is an important first step. You are eligible for receiving one free copy of your credit report annually from each of the primary credit reporting bureaus.
Closely review your credit report for any inaccurately reported information that might be contributing to a lower credit score. Each of the credit bureaus now has a simple means of disputing errors using their website forms.
What is a good credit score to buy a car? Equifax considers scores of 670 or more as good.
If your score is lower than this, you might consider postponing your purchase to allow time for improving your credit.
If the need for a vehicle is immediate, you may try asking a friend or family member with better credit to co-sign on a car loan to help obtain a more affordable interest rate.
Keep in mind that some lenders might offer more favorable loan terms to borrowers who agree to pay their monthly payments electronically using autopay through a checking account.
Loan Term
With today’s high prices, car loans have lengthier terms so borrowers can afford the monthly payments. A correlation exists between longer-term loans and the likelihood of nonpayment, thus raising interest rates as a means of collecting more upfront money.
Generally, the longer-term loans have higher interest rates, particularly those exceeding 60 months. Keep in mind that longer loans accrue larger amounts of interest and in the meanwhile, the value of a car declines (depreciates).
Used cars depreciate by approximately 15% annually, meaning that a borrower may develop negative equity aka be “underwater.” This simply means that the borrower owes more on the car loan than the vehicle is worth.
Traditional banks and specialty auto lenders now promote longer-term loans. For example, the Bank of America offers 75-month terms, AUTOPAY and LightStream offer 84-month terms, and Navy Federal Credit Union offers a 96-month new car loan.
Financial institutions now offer vehicle refinance loans. Borrowers with existing car loans may choose to refinance for lowering their interest rates, reducing their monthly payments, and other reasons that generally either extend or shorten loan terms.
Down Payment
Many subprime borrowers find that having a reasonable down payment may be necessary for simply obtaining an auto loan. Others find that having a significant down payment may allow them to secure lower interest rates.
Shoppers with poor credit are encouraged to accumulate a substantial down payment as a means of reducing the amount they will need to borrow, as those with a low credit score will likely pay much higher interest on the loan.
Although zero-down loans might appear attractive, they place the borrower at a much higher risk of winding up with negative equity.
The following example shows the impact of a down payment on a car loan with a higher interest rate (12%).
Down Payment by Interest Rate
| Vehicle Price | APR % | Term | Down Payment | Monthly Payment | Total Interest |
| $ 15,000 | 12 % | 48 mos | $ 0 | $395 | $ 3,960 |
| $ 15,000 | 12 % | 48 mos | $ 2,000 | $342 | $ 3,432 |
| $ 15,000 | 12 % | 48 mos | $ 3,000 | $316 | $ 3,168 |
New vs Used Vehicle
Data from Experian showed that used car loan interest rates generally exceeded new car loan rates; however, expect that the purchase price of a new vehicle will be higher.
On average, those financing a used car paid about four percentage points more compared to those who financed a new car. The four-percentage point gap will narrow as the borrower’s credit score increases and equates to roughly 1% among used buyers with excellent credit.
Part of the reason why used car financing rates are higher is based on risk. Used cars have a lower value, meaning they are more likely to be “totaled” in an accident, which is a scenario where finance companies have a higher likelihood of losing money.
Income and Debt
In addition to your credit score, your monthly income, and current expenses are considerations for lenders when assessing risk and adjusting interest rates accordingly.
Is your income sufficient to make the potential monthly car payment after satisfying your existing monthly debts? Prospective borrowers should make this assessment as part of their own budgeting as well to determine what they can realistically afford.
This concept is quantified through your debt-to-income ratio (DTI) or “back-end” ratio, which is calculated as follows:
DTI (%) = Monthly Debt Expense / Gross Monthly Income
Remember that gross monthly income does not equate to “take-home” or net pay after taxes. The general standard that many lenders follow is that applicants should have a DTI of less than 36%.
Other related factors that lenders may consider include the stability of your employment and residency. This is why applications often ask the length of time you have been with your current employer and lived at your current address.
Lender
One of the primary types of auto loan lenders today is referred to as captive finance companies. One of the best analogies exists outside the scope of auto loan financing in the realm of retail store credit cards when a “captive” buyer is making a purchasing decision.
In auto financing, captives are often subsidiaries of an auto manufacturer i.e., Ford Credit, Toyota Financial Services, or other different lenders or financial institutions that act as contracted service providers for dealerships.
Market Share by Lender Type (2020)
| New | Used | |
| Captive Financing | 62.21 % | 8.77 % |
| Banks | 22.82 % | 32.5 % |
| Credit Unions | 9.49 % | 24.66 % |
| Finance Companies | 4.57 % | 16.04 % |
| Other | 0.91 % | 18.03 % |
Source: Experian State of Auto Finance Market
How Does Having a Low-Interest Rate Help?
With the price of vehicles today, pursuing lower interest rates is critical for overall affordability. The following chart shows the longer-term impact that rates have.
Cost of $20,000 Loan Over Six-Year (72 Month) Term
| FICO Score | Average APR | Monthly Payment | Total Interest Expense | Total Cost |
| 781 – 850 | 3.5 % | $308 | $ 2,202 | $ 22,202 |
| 661 – 780 | 4.5 % | $317 | $ 2,858 | $ 22,858 |
| 601 – 660 | 7.5 % | $346 | $ 4,898 | $ 24,898 |
| 501 – 600 | 12 % | $391 | $ 8,152 | $ 28,152 |
| 300 – 500 | 15 % | $423 | $ 10,449 | $ 30,449 |
Source: BadCredit.org
How Do I Get a Lower Car Loan Rate?
Improve Your Credit Score
FICO recommends that consumers seeking to improve their credit should take a comprehensive approach that involves checking their reports for errors, paying all bills on time, paying down existing debts, and others.
One strategy that has demonstrated success in improving credit scores is obtaining a credit builder loan, such as from Credit Strong. Credit Strong is a direct division of Austin Capital Bank, an FDIC-insured independent community bank.
They create a specialized installment loan for improving credit.
Rather than receiving the loan funds, they are placed in a savings account that secures the loan. Over the term of the loan, you make fixed loan payments toward the principal and interest.
Credit Strong regularly reports the ongoing payment history to all three credit bureaus. Once the loan has been paid back in full, you have access to the funds in the savings account. Check out pricing and plans here.
Try to Get a Preapproved Loan
A prospective car buyer may secure a pre-approved car loan from a bank, credit union, or online lender such as AUTOPAY. Here, lenders will pre-approve borrowers for a designated maximum loan amount and interest rate toward a vehicle purchase.
Having a preapproval may strengthen your ability to negotiate on price since you have already obtained the financing elsewhere. It also may prevent you from higher interest rates which might result from hidden dealer markups that often exist in their financing programs.
A pre-approval also may motivate a dealer to compete by shopping around for lower interest rate financing through their network of lenders. Keep in mind that a prequalification should not be confused with a pre-approval, as it typically does not afford you a guarantee.
Pay a Higher Down Payment
Having a reasonable down payment on hand may assist buyers financially in a variety of ways. Those with a poor credit score will pay higher interest rates on the money they borrow; therefore, a larger down payment will reduce the amount needed to be financed.
Some lenders may offer more favorable loan terms when a down payment is secured. Also, a larger down payment can reduce monthly payments thus freeing up money to pay down other debts that are accruing interest.
The bottom line is that individuals with bad credit will likely pay more when financing purchases, which is magnified when involving higher-ticket items such as automobiles.
CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.
