Average Car Loan Interest Rate by Credit Score
How Credit Scores Affect Car Loan Interest Rates
Lenders use your credit score as a measure of risk. Essentially, it helps them determine how likely you are to repay the loan. The most commonly used credit score model in the U.S. is the FICO score, which ranges from 300 to 850. Here's a breakdown of how credit scores can affect car loan interest rates:
| Credit Score Range | Average New Car Loan APR | Average Used Car Loan APR |
|---|---|---|
| 781 - 850 (Super Prime) | 3.24% | 3.64% |
| 661 - 780 (Prime) | 4.21% | 6.05% |
| 601 - 660 (Non-Prime) | 7.03% | 11.26% |
| 501 - 600 (Subprime) | 10.98% | 17.46% |
| 300 - 500 (Deep Subprime) | 14.59% | 20.58% |
As seen in the table above, individuals with higher credit scores (super prime and prime) benefit from significantly lower interest rates compared to those with lower credit scores (subprime and deep subprime). For example, someone with a super prime score might receive an interest rate of around 3.24% for a new car loan, while someone with a deep subprime score might face an interest rate of 14.59% or higher.
The Cost of a Higher Interest Rate
A higher interest rate can drastically increase the total amount you pay for your car. Let's illustrate this with an example:
Assume you are financing a $30,000 car with a 60-month loan. Here’s how your monthly payments and total interest paid would vary based on different interest rates:
| Credit Score | APR | Monthly Payment | Total Interest Paid |
|---|---|---|---|
| Super Prime (781 - 850) | 3.24% | $542 | $2,520 |
| Prime (661 - 780) | 4.21% | $556 | $3,360 |
| Non-Prime (601 - 660) | 7.03% | $594 | $5,640 |
| Subprime (501 - 600) | 10.98% | $649 | $8,940 |
| Deep Subprime (300 - 500) | 14.59% | $704 | $12,240 |
As shown, if you fall into the deep subprime category, you could end up paying $12,240 in interest over five years, which is nearly five times more than the interest paid by someone in the super prime category.
Improving Your Credit Score
If your credit score is on the lower end, there are steps you can take to improve it before applying for a car loan:
- Pay Your Bills on Time: Payment history makes up 35% of your credit score. Ensure all your bills are paid by their due dates.
- Reduce Debt: Lowering your credit card balances can boost your score, as credit utilization accounts for 30% of your score.
- Avoid Opening New Credit Accounts: Each new credit inquiry can temporarily lower your score, so avoid opening unnecessary accounts.
- Check Your Credit Report for Errors: Mistakes on your credit report can drag down your score. Regularly check your report and dispute any inaccuracies.
Improving your credit score can take time, but even a modest increase can lead to better loan terms and save you thousands of dollars in interest.
Alternatives for Lower Credit Scores
If you're unable to improve your credit score before you need to finance a car, consider the following alternatives:
- Shop Around: Different lenders offer different rates. Shopping around can help you find the best deal.
- Consider a Co-Signer: If you have a trusted family member or friend with a better credit score, having them co-sign the loan can help you secure a lower interest rate.
- Make a Larger Down Payment: This reduces the amount you need to finance, which can lead to better loan terms.
- Opt for a Shorter Loan Term: Although this will increase your monthly payments, it will reduce the total interest paid over the life of the loan.
Conclusion
Your credit score has a significant impact on the interest rate you'll receive on a car loan. By understanding the average interest rates associated with different credit score ranges, you can better prepare yourself for the financing process. Whether it's improving your credit score, shopping around for the best rates, or considering alternative financing options, taking the time to explore your options can save you a substantial amount of money.
Popular Comments
No Comments Yet