Buying a used car usually means taking out a loan to cover the cost. Getting approved for the loan is the first step in the process, but it is important to consider the interest rate the lender is offering before you sign the paperwork. A high interest rate means higher monthly payments, while a low interest means you’ll save money over the life of the loan.
To ensure you get the best rate on your used car loan, it’s useful to explore the factors that lenders consider when determining interest rates and to take a look at the average interest rates for different credit scores.
If you discover that you may be subject to high interest rates, it is also helpful to identify how you can raise your credit score to get a better rate when you apply.
How Does a Used Car Loan Work?
When purchasing a used car, one of the ways you can pay for the vehicle is through used car financing. You can apply for financing through a used car dealership, a traditional bank, or a reputable credit union. Once you are approved for the loan, your lender will go over the terms and conditions, which include:
- Loan term (how long you will make payments)
- APR (annual percentage rate or interest rate) for the loan
- Monthly payment amount
- Total loan amount
If you agree to these terms, you sign the loan, and the funds are dispersed to purchase the vehicle. You are then responsible for making on-time payments until the loan is paid off.
Why is My Interest Rate Important?
When a lender gives you a loan, the money is expressed as principal and interest. The principal is the original amount of the loan that you borrow to buy the car. The interest is an extra amount that the lender charges for allowing you to borrow money. The amount of interest you pay is determined by the interest rate on the loan.
A high interest rate means that you’ll pay more each month and over the course of the loan, whereas a low interest rate saves you money with lower payments and, therefore, lower payback amount overall.
Low interest rates are best; however, a good interest rate is one that is fair to both you and the lender and is indicative of your credit history.
Factors that Influence Car Loan Interest Rates
When you apply for a used car loan, the lender looks at several factors to determine your interest rate.
The biggest determining factor is the information in your credit report. Your credit report is a document that contains your credit history, including debts, payment history, and debt-to-income ratio. This information tells a lender how trustworthy you might be to lend money to. If you have poor payment history or a high debt-to-income ratio, a lender may charge you a higher interest rate to safeguard the loan.
Your credit report also contains your credit score, a number that represents your overall financial trustworthiness. Credit scores range from about 300 to 800. If you have a low credit score, you can expect higher interest rates. If you have good credit, you will most likely be offered better interest rates.
Lenders also consider the make, model, year, and value of the vehicle you want to purchase. Cars with higher value typically carry a lower interest rate, whereas cars that may require repairs or add risk to the loan transaction may incur higher interest fees.
Finally, lenders also look at the down payment amount you can put toward the purchase. If you plan to borrow the full amount, you may have a higher interest rate offer because you are taking on a higher loan amount. However, if you make a significant down payment, you lower the loan amount, making the transaction less risky for the lender and, therefore, receive a lower interest rate on the loan.
Below are the average used car loan interest rates for varying credit scores as of September 2021.
- 300 to 500 = 14.59%
- 501 to 600 = 11.03%
- 601 to 660 = 6.61%
- 661 to 780 = 3.48%
- 781 to 850 = 2.34%
According to these numbers, you can consider a good interest rate somewhere in the range of 2.34% to 6.61% since these numbers correlate with super-prime and average credit scores.
How to Get the Best Interest Rate on Your Car Loan
There are a few actions you can take to get the best auto loan interest rate. First, you can work to improve your credit history and credit score. Second, you can apply for pre-approval with a lender, allowing you to negotiate with sellers and get a better price on the car. Third, you can choose to apply with a credit union like T&I Credit Union rather than go through another lender.
Improve Your Credit Score
To improve your credit score, take a look at your personal finances. Get a copy of your credit report and verify that all the information is correct. Pay down any outstanding balances on credit cards, and establish an on-time payment history. These actions should increase your score so that when you apply, you can get a better rate.
Take advantage of the pre-approval process to have better negotiating and budgeting power. When you fill out the loan application for pre-approval, you understand what you can spend and your interest rate. You can also negotiate a better price because you can show a seller that you are already pre-approved. This can lower your interest rate.
Use a Credit Union
The best way to lower your interest rate is to apply with a lender like T&I Credit Union instead of a dealership or bank. Dealerships often offer high interest rates, and banks, like Bank of America, have stringent requirements that keep interest rates high for those without super-prime credit.
T&I Credit Union offers fair terms on 84-month loans for new cars and 60-month loans for used cars. Our current APR starts at just 2.99%, an excellent interest rate for a used car loan.
Apply for Your Used Car Loan With T&I Credit Union
If you are looking for a used car loan at a fair interest rate, start the pre-approval process with T&I Credit Union today. Contact us at (248) 588-6688 to speak with one of our Loan Officers or apply for pre-approval online.