Auto Loan Interest Rates by Credit Score (Sep 2024)
An auto loan is a type of secured loan that uses the car that’s being financed as collateral. When you finance a car, the lender becomes the lienholder and is the owner of the car title until you pay the loan off.
In essence, this means that while you have the legal right to possess and use the car, it’s the lender that truly owns it. If you fail to make your loan payments, the financial institution can repossess the vehicle.
When you shop for auto loans, you’ll likely see them advertised by annual percentage rate (APR). This figure includes your interest rate and the fees and other costs that come with the loan.
Before you start filling out loan applications, consider using an auto loan calculator to help you get an idea of how rates affect what you might pay. Many loan calculators allow you to enter basic information such as your desired loan amount, rate and term to see how much your monthly car payments would be and how much you’d pay in interest over the lifetime of a loan.
What Factors Affect Auto Loan Rates?
Auto lenders set interest rates based in part on the likelihood of repayment. The riskier the loan is for the lender, the higher the interest rate it is likely to charge. Several factors indicate risk to lenders and can affect the interest rate you get on a loan.
Here are the most critical factors used to determine your rates:
- Credit score: Your credit score is the factor that carries the most weight. The lower your score is, the higher your interest rate is likely to be.
- Credit history: Your credit score is part of your credit history, but it isn’t all of it. Lenders look at a detailed credit report that includes information about how much of your available credit you’re using and whether you’ve missed monthly payments.
- Loan term: Car loans generally have terms ranging from 12 to 84 months. Longer terms typically translate to lower monthly payments, but they also tend to come with higher interest rates.
- Market rates: The average market rate is a significant factor in the rates you get. Lenders adjust their rates based on what they pay to borrow money, so you’ll see higher rates if the average interest rate goes up.
- Loan-to-value (LTV) ratio: The LTV ratio expresses how much of a car’s value is borrowed. For example, if you want to borrow $20,000 for a car that’s worth $40,000, that’s an LTV ratio of 50%. The lower the LTV ratio is, the lower your interest rate is likely to be.
- Down payment: Your down payment, whether in cash or in the form of a trade-in, affects the LTV ratio. You can find zero-money-down car loans, but you’ll typically get better interest rates by making a larger down payment.
- Debt-to-income (DTI) ratio: Your DTI ratio is the amount you have to pay in debt obligations every month compared to your monthly income. While your debt factors into your credit score, lenders will also look at your DTI ratio to see how much you can realistically afford to pay. The lower your ratio of debt payments to income, the lower your auto loan rates are likely to be.
- Vehicle’s age and condition: Lenders typically have age, mileage and condition restrictions for financed vehicles, and they adjust rates based on those factors. Loans for older, higher-mileage vehicles or those in bad condition come with higher interest rates.
What Goes Into Your Credit Score?
Credit scores have been widely used since 1989, when FICO, which currently has the most popular scoring model, introduced its system. Credit scores are meant to tell lenders how likely you are to make your required payments on time and in full. Your FICO credit score is based on the five factors below, which are weighted differently.
- Payment history (35%): One of the most significant factors in your credit score is whether you’ve missed payments. This includes whether you’ve had accounts that were delinquent.
- Amounts owed (30%): While having debt doesn’t necessarily mean you’ll have a low credit score, using too much of your available credit can cause your score to fall.
- Length of credit history (15%): How long you’ve had accounts open with creditors affects your score. Having older accounts with long histories of regular, on-time payments will boost your credit score.
- New credit (10%): Opening a new credit account can temporarily cause your credit score to drop.
- Credit mix (10%): The variety of credit accounts you have, such as credit cards, student loans and a mortgage, impacts your score.
In the graphic below, you’ll find some steps that may help to increase your credit score and help lower your loan rates.
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