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Your Guide to Auto Loan Interest Rates: How to Get the Best Rate Possible

Unlocking the Secrets of Auto Loan Interest Rates: Your Guide to Getting the Best Rate Possible

March 4, 2024, 4:15 amupdated March 4, 2024, 4:20 am 1.3k Views

Auto Loan Interest Rates

Your Guide to Auto Loan Interest Rates: How to Get the Best Rate Possible

Auto Loan Interest Rates can vary significantly based on your credit score, affecting the total amount you pay for your vehicle.

Auto Loan Interest Rates: A Deep Dive into What You Need to Know

Auto loan rates for new and used cars have surged in late 2023, reaching 15-year highs of 7.18% and 11.93%, respectively, according to Experian. This spike is primarily due to persistent inflation in the U.S. economy. However, your credit score can significantly impact the rate you receive on an auto loan. For instance, individuals with excellent credit scores may qualify for rates under 5% on a new car loan, while those with scores below 500 might face rates of 18% or more, if they qualify at all.

How Credit Scores Affect Auto Loan Rates

Your credit score plays a vital role in determining the interest rate on your auto loan. When you apply for an auto loan, lenders review your credit profile to assess how responsibly you manage debt. A low credit score suggests a higher likelihood of default, prompting lenders to offer a higher rate to offset the risk. In contrast, higher credit scores indicate a lower risk, leading to lower rates for borrowers.

Here’s a breakdown of the average auto loan rates received by borrowers in the fourth quarter of 2023, based on FICO credit score ranges:

780 and above: 5.00%
660 to 779: 7.00%
620 to 659: 11.00%
580 to 619: 17.00%
Below 579: 23.00%

The Impact of Credit on Loan Costs

The difference in costs between a good credit loan and a bad credit car loan can be staggering. Let’s consider a scenario with a five-year new car loan of $30,000:

Credit score of 780: Rate of 6.00%, monthly payments of $580, and total interest of $4,799.
Credit score of 550: Rate of 12.00%, monthly payments of $667, and total interest of $10,040.

In this example, the borrower with the lower credit score ends up paying $5,241 more in interest over the loan’s life.

State-by-State Loan Rate Variations

Beyond credit scores, where you live can also influence your auto loan rates. State laws, taxes, and fees can drive up APRs, with different states experiencing varying average rates. For instance, Minnesota, Nebraska, and Wyoming had the lowest average APRs for new car loans in January 2024, while the District of Columbia, Georgia, and New Mexico had the highest average rates.

The Road Ahead: Trends and Predictions

While the fourth quarter of 2023 saw lower APRs for longer loan terms and more promotional 0% financing, average APRs for both new and used vehicles hit record highs. The Federal Reserve’s decision to hold the federal funds rate between 5.25% and 5.5% since July and expectations of a one-percentage-point decrease in 2024 suggest that auto loan rates may start descending but remain elevated compared to recent years. Recovering inventories may result in lower vehicle prices, increasing buyers’ borrowing power.

Factors Influencing Auto Loan Rates

Besides credit scores, lenders consider various factors when determining auto loan eligibility and rates:

Credit profile
Loan term
Amount borrowed
Down payment
Market rates
Vehicle type
Lender policies

Getting a Better Car Loan Rate

Qualifying for a low-interest rate can lead to significant savings over time. Here are six steps to improve your chances of securing a lower rate:

Improve your credit scores.
Shop around and compare quotes from different lenders.
Consider a shorter loan term.
Make a larger down payment.
Use a cosigner or co-borrower.
Explore refinancing options.

Where to Find the Best Auto Loans

You can obtain auto financing through traditional lenders, online lenders, or your dealership. Credit unions often offer lower rates due to their nonprofit status, while banks provide security and reliability. Online lenders may offer more favorable rates and fees, but they lack in-person service. Dealer-arranged financing is the simplest but may not be the cheapest. Captive financing from vehicle manufacturers can offer special financing offers but usually requires excellent credit.

FAQs

Can I negotiate my auto loan interest rate?
Yes, auto loan interest rates are negotiable, especially when financing through a dealership. Comparing rates from different lenders and applying with a strong application can increase your chances of negotiating a lower rate.

What credit score do I need for an auto loan?
Credit score requirements vary by lender, but generally, good credit or better (FICO score of 670 and up) is preferred for the best rates and terms.

Can I get an auto loan with bad credit?
Yes, there are lenders that approve borrowers with bad credit, but expect higher interest rates and fees. Consider applying with a cosigner or co-borrower to improve your chances.

Are interest rates on auto loans rising?
Yes, according to Edmunds data from January 2024, the average APR for used vehicles is the highest it’s ever been. The Federal Reserve’s rate increases have contributed to this trend.

Conclusion

Auto loan interest rates are at 15-year highs, driven by inflation and credit scores. While rates may start descending in 2024, they are likely to remain elevated. Borrowers can take steps to qualify for better rates, and where they live also influences rates. Shopping around and understanding lender criteria are essential to securing the best auto loan rate.

This article was written by NewsBurrow Press Team, with contributions from Ava Roberts and Liam Foster.

Whether you’re dreaming of a brand-new ride or have your eye on a trusty used set of wheels, the journey to your perfect vehicle starts with understanding your credit score. As the auto loan interest rates by credit score showcase, your financial standing plays a pivotal role in determining the cost of your car loan. The good news? With a bit of strategic planning and a keen eye on your credit score, you can secure a rate that makes your dream car a reality.

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