Did you know that the average price of a new car is around $40,000? Most people that are looking for cars simply don’t have this type of money lying around.
Unfortunately, cars are a necessary part of many people’s lives and work. That’s why car loans are a popular way for the average person to afford and pay off their new or used vehicle.
If you’re considering applying for an auto loan, then you likely know that they come with a wide assortment of interest rates. But what exactly determines these car loan rates?
And is it possible to lower them at all? If you want to know the answer to these questions and more, then you’re in the right place. In this guide, we’ll answer your car loan rate questions, as well as basic information about auto loans. Let’s get started!
What Is an Auto Loan and How Does It Work?
As its name suggests, an auto loan is a personal loan that you take out as collateral on your new or used car. Instead of paying with cash, you’ll be purchasing the vehicle from the dealer using financing.
Car loans are quite popular, with over 85% of new vehicles having one. Sounds simple right? Well, it gets a little more complicated. You see, there’s a variety of options when it comes to car loans.
For example, you can take out a small loan for $2,000 or a larger one for $100,000. You can also spread payments out throughout a designated amount of time. Generally, they range from one to three to five years.
You can also pay them weekly, biweekly, or monthly. Most importantly, car loans come with different interest rates. As we will see, business rates can greatly increase or decrease the cost of your loan. Let’s take a look at how and why.
What Determines Car Loan Rates?
When you get a car loan it comes with an interest rate that can be high, low, or somewhere in between. Why do lenders tack on these interest rates? Simple: to protect their interest.
Someone that represents a risky borrower means there’s a good chance that they might not be able to pay their loan back. So, to protect their money lenders will increase the interest rate that comes with borrowing money.
That way, they don’t lose money in the event of the money following through. Meanwhile, someone who’s a non-risky borrower is likely to make all their payments on time.
As such, they’re rewarded with lower interest rates. Make sure to check out this helpful article if you want to learn more about how car loan rates work. So, what factors go into determining car loan rates?
While credit score is an important part of the equation, it isn’t the only thing that matters. Make sure to check out this helpful article if you want to learn more about how car loan rates work.
1) Credit Score
As we mentioned, your credit score is one of the main factors that lenders use to determine your loan rates. This is an indication of how responsible you’ve been in the past, as well as your income and other factors.
The higher your credit score, the lower your car rate loan will be. A credit score of over 750 is considered excellent. Someone with this score can get an average loan rate of between 2.5%.
In some cases, they can even get a rate that’s as low as 0% which would save them thousands. Someone with a score of 700 to 749 has good credit that comes with an average loan rate of 2.6%.
However, it’s not likely that they’ll be able to qualify for a 0% rate. Someone with a credit score of 600 to 699 has fair credit that comes with an average loan rate of 2.7%.
Finally, someone with a credit score of 451 to 599 has bad credit that comes with an average loan rate of 5%.
2) Vehicle Type
There are a variety of vehicle factors that can affect the loan rates on the car you’re interested in. The first is the age of the car. Most of the time, new vehicles tend to come with much lower loan rates than older, used cars.
The more years on the car, the higher your loan rate will be. Similarly, the more miles on the car, the more expensive it will be.
This is because there’s a high chance that the car could break down for good. And, when this happens the lender loses their investment.
3) State You Live In
It’s important to also pay attention to the state that you currently reside in.
Some states have laws about how much lenders can charge you in terms of loan rates. So, in some cases, it could be illegal for them to charge too much.
4) The Federal Rate
Similarly, to state laws, lenders can also be influenced by something known as the federal rate. This is a rate set by the Federal Reserve which influences the amount that lenders can charge their customers.
This amount can change from quarter to quarter, so it’s important to pay attention to it closely.
Why Is It Important to Have the Lowest Car Loan Rates Possible?
To understand why it’s important to have a low-interest rate let’s take a look at an example. Let’s say you want to buy a $36,000 car. After putting down a down payment of 20% you still owe $28,800.
Now, if you have good credit, then you can get a loan at a 2.5% interest rate. That means that you’ll pay around $1,800 in interest payments. However, if you have a bad credit rating, then you’ll need to pay something closer to a 6.76% interest rate.
That means you’ll need to pay total interest of around $5,000. As you can see, it’s worth it to save a lot of money by getting the lowest interest rate you possibly can.
Can You Lower Your Auto Loan Interest Rate?
The best way to get better auto loan interest rates is to gradually improve your credit score. You can do this by doing things like paying your bills on time. It can also greatly increase your score if you lower your debt to income ratio.
Unfortunately, this is often easier said than done. Still, stick with it and you should see yourself slipping into a higher bracket of credit scores. When this happens you can typically find better rates by comparing the rates between different lenders.
When you do this make sure to know the average rate for your credit score bracket. That way, you know whether or not you’re getting a good or bad deal. So, are there any other ways you can get a car loan with bad credit?
Well, one way is by paying a larger down payment on the vehicle. This shows that you have the money to back up the payments you’re making. As such, it will lower your rates.
Another way is to find help from a co-signer. This is someone who signs the loan with you as a backup option in case you default. if you do default, then your co-signer will be in charge of payments.
How Do You Get an Auto Loan?
The first step to getting an auto loan is to shop around at different vendors. We recommend comparing at least three. Try and pick ones that cater toward lenders that offer repayment plans and APRs that fall within your ideal budget.
Once you find the right lenders, then it’s time to prequalify. This option allows you to see the rates that will likely be available to you without having to undergo a hard credit check.
Once you decide that the rates are right for you, then you can begin the application process. To do this you will need a variety of information about the car, including its registration, title, and purchasing agreement.
You will also need personal documentation like a driver’s license, proof of income, and proof of residence. If and when your loan is accepted, then you can start making scheduled payments on your vehicle.
We recommend setting up automated payments, so you never forget a scheduled payment. If you do, then it can negatively affect your credit score.
Want More Content? Keep Reading
We hope this article helped you learn more about car loan rates and how they work. It’s important to remember that not all lending companies will provide you with the same rate.
That’s why you must shop around to find the lowest possible car loan rate. Ideally, you’ll find an option that provides you with side-by-side comparisons so you know for sure that you’re getting the best possible deal.
Did you enjoy this article? If the answer is yes, then you’re in the right place. Keep exploring to find more topics that you’re sure to love.