A wide range of factors affect the car interest rates. One of the most influential factors out of those is the credit score. Having knowledge about car loan interest rates will give you a clear idea about whether or not you will qualify for a car loan at a good rate.
Car Interest Rates
Presently, the average car interest rate in the U.S. is at 9.00%. APRs are the rates that you see commonly advertised on car loan sites. There are various factors that affect the APRs one gets.
Average Car Interest Rates – Credit Score
Creditors usually group customers into categories known as credit bands, which are based on their credit score. While there are many factors influencing car interest rates, credit band has the most weight.
Average Car Interest Rates – State
Car interest rates are also influenced by monetary policies in every state. These policies are mainly affected by changes in federal treasury rate. This influences the interest lenders charge. So, there will be different average rates for new and used cars in the District of Columbia and all the U.S. states.
Average Car Interest Rates – Vehicle
While financing your vehicle, the kind of the vehicle also affects the interest rates you are offered. Different vehicle kinds have different demands and prices, which influence the interest rates one is charged over car loan courses.
How Car Loans Work
Basically, a car loan is a kind of secured loan that finances the car while taking that car as collateral. Once you finance the car, till the time you do not pay off the loan, the lender becomes and stays as the owner of the car title.
What Factors Affect Car Loan Rates
Car loan lenders offer interest rates based on the probability of repayment. Below are some of the important factors that play a crucial role in deciding your interest rates.
Loan Term – Generally, the car loan terms range from 12 to 84 months. The longer term, the lower monthly payments shall be. But long-term loans will also attract high interest rates as well.
Credit Score – The factor that carries the most points is your credit score. The lower your credit score, the higher your interest rate shall be.
Market Rates – Your interest rates depend on average market rates. If the average market rate goes up, then you will also get higher rates and vice versa.
Credit History – One’s credit history is another important part of your credit score. Lenders usually analyze the detailed credit report. This report includes important information like if you have any missed monthly payments ever.
Vehicle Down Payment – The amount of down payment you pay plays an important role, too. It will help you in getting a good interest rate. You will get better car loan rates by giving a larger down payment.
Vehicle’s Age and Condition – Generally, lenders have mileage, age, and condition restrictions for financed vehicles. They charge higher rates based on factors like higher mileage, older vehicles, or those not in good condition.
What Goes Into Your Credit Score
Since 1989, credit scores have been widely used. Your credit score is calculated using the five factors below according to their weightage.
Payment History (35%) – The most crucial factor in deciding your credit score is whether you have missed any payments in the past.
Amounts Owed (30%) – Having debt does not cause a low credit score. However, using too much available credit can result in a decline in credit score.
Length Of Credit History (15%) – If you own an old account with the creditors, then it is good news for you. As it affects your credit score positively. Being an old account holder with a long history of on-time, regular payments will boost your credit score.
New Credit (10%) – Opening a new credit account can cause a drop in credit score for a short period.
Credit Mix (10%) – A good mix of credit accounts also positively impacts your credit score. Having a variety of credit accounts, like student loans, credit cards, and a mortgage, affect your credit score.
Where Will You Get Best Car Interest Rates
Banks – Many traditional banks offer car loans on used and new cars. Having an older savings account or checking account with a bank can make getting a car loan approval from the financial institution an easy task. There are also chances of getting better interest rates.
Online Lenders – Online lenders are divisions of commercial banks or backed by commercial banks. These online lending institutions sometimes offer lower rates since they do not have the overhead of physical branches like credit unions and banks.
Credit Unions –Credit unions offer refinancing and financing for new and used vehicles. Joining credit union can do wonders for you as they provide lower interest rates.
Dealerships – Sometimes, car dealerships also provide car loans with the lowest rates of interest. There is also an option for 0% financing for people with good credit scores available.
How To Find Lower Interest Rates on Car Loan
Below are tips that can help you get the best car loan rates:
Increase Down Payment – To get better interest rates, make a bigger down payment, which will eventually reduce LTV ratio on car loan.
Get A Discount – By simply setting automatic payments, you can get common discounts in car finance industry. This can decrease the interest rate by almost 0.5%.
Choose A Shorter Loan Term – You should always opt for shorter car loan terms with higher payments. The longer loan terms with lower monthly payments usually come with high interest rates. Add Co-Signer – Did you find out you have a low credit score? Then, this step will help you get a lower car loan interest rate. You can take help from a family member or a friend with a nice credit score to cosign a loan.
