What’s the Average Interest Rate on a Car
Most people need to take out a car loan to purchase a vehicle. This is a major purchase, and it’s often not feasible for people to pay in cash. Fortunately, there are many different auto loans available that can help you with this task. When you take out a loan, you have to pay interest to the lender for the convenience of borrowing money from them. As you’ll see, your credit score plays a big role in the interest rate you can expect. Here’s what you need to know.
Understanding Credit Scores
Your credit score is a number between 300 and 850 that tells lenders how much of a risk you present regarding credit cards, loans, and other types of financial offers. The lower your credit score, the higher the risk for the lender. Since the lender’s primary concern is protecting their assets, they will charge individuals more to take out a loan with a poor credit score than a high one.
Five key factors determine your credit score:
- Payment history: 35% of your FICO score comes from your history of making on-time payments on your outstanding debt.
- Amounts owed: 30% of your FICO score is determined by the amount you owe on your accounts. Creditors prefer that you use no more than 30% of the credit available to you.
- Length of credit history: 15% of your score is determined by the length of your credit history, which includes the age of your oldest account, the age of your youngest account, and the average age of all your accounts. A longer credit history leads to higher credit scores.
- Credit mix: 10% of your credit score is determined by the combination of your accounts. Lenders like to see several different accounts like a mortgage, car loan, credit card, and student loan.
- New credit: 10% of your score is determined by the number of new credit lines you’ve recently opened or attempted to open. It’s best not to have a lot of new credit accounts.
Understanding Interest Rates
The interest rate is the percentage of your total loan amount that you pay to the lender for the privilege of taking out the loan. Interest is usually calculated annually, though you’ll pay a portion of the interest with each month’s payment. There’s no such thing as free money, and interest rates prove this.
The interest rate for a loan is one of the most important factors to consider because it determines the final cost you’ll pay for your car. For example, if you take out a 60-month loan for $25,000 with an interest rate of 3.48%, you’ll ultimately pay $27,274 for the car. If your interest rate is 20.58%, you’ll pay $40,226 over the same 60-month period for the same $25,000 vehicle. As you can see, your credit score and interest rate are critically important when budgeting for a car.
>h3>The Average Interest Rate for a Good Credit Score
If you have a good credit score between 661 and 780, you should enjoy an average interest rate of around 3.48% for a new car and around 5.49% for a used car. If your credit score is in the exceptional range at 781 or above, you can expect an interest rate around just 2.34% for a new car and only 3.66% for a used car. Whenever possible, you should try to get your credit score into these ranges so you can enjoy the lowest rates for your loan.
The Average Interest Rate for a Fair Credit Score
If you have a fair credit score between 601 and 660, you’ll find an average interest rate of 6.61% for a new car. For a used car, your average interest rate will be around 10.49%. Though higher than your average rate with a good credit score, this is still around half of what you’ll pay with a very low credit score.
The Average Interest Rate for a Poor Credit Score
If your credit score is between 501 and 600, you’ll find the average interest rate is 11.03% for a new car and 17.11% for a used car.
If your credit score is 500 or below, you can expect to have one of the highest interest rates around. For a new car, your interest rate will average around 14.59%. For a used car, you can expect to pay an average interest rate of 20.58%.
Why Are Interest Rates Higher for Used Cars?
As you’ve likely noticed from the above information, interest rates are significantly higher for used vehicles than new ones. This may seem counterintuitive since a used car is typically much cheaper. The difference is because lenders have to assess risk, not value.
A used car is a greater risk because multiple factors affect how long it will last. On the other hand, a new car doesn’t have any chance of accident history, wear and tear, or other underlying problems. Since you know what you’re getting, assessing the valuation of a new car is less risky for the lender. Therefore, you’re able to get a lower interest rate on the purchase.
How To Lower the Interest Rate on Your Car Loan
If you’re cringing at the average interest rate assessed for your credit score, you can improve this number by working on your credit score before applying for a car loan. Making on-time payments and paying down your credit card debt are the fastest ways to improve your score.
If you have a low credit score and you need a vehicle now, you’ll be happy to know that many lenders can help you, and by shopping around, you may find a rate that’s lower than average. You can also aim to refinance your car loan in the future and get a better rate later on.
If you’re interested in exploring the current market for used vehicles, we have plenty of options for you to explore. Check out our inventory at North Coast Auto Mall. You’ll find a wide range of vehicles in different price ranges, making it easier than ever to get what you need.