When it comes time to purchase a new or used car, one of the most important factors that will determine how much you end up paying is the interest rate on your auto loan. Your credit score plays a major role in determining what interest rate lenders will offer you. Understanding how your credit impacts auto loan rates can help you get the best financing deal when buying a car.
This article will explore how credit scores influence auto loan interest rates. We’ll look at the average rates offered for different credit score ranges and provide tips on how to get the lowest rate possible for your credit profile. Read on to learn more about how your credit affects car loan rates.
How Credit Scores Influence Auto Loan Interest Rates
Lenders use credit scores as an indication of how likely you are to repay debts. Auto loans are installment loans, meaning you pay back a fixed monthly amount over a set repayment term. Lenders offer lower interest rates to borrowers with higher credit scores due to the lower perceived risk.
Your credit score shows your past borrowing and repayment history. Scores range from 300 to 850, with a higher score indicating better credit health. Anything under 600 is generally considered poor credit, while 700 and above is good to excellent credit. Auto lenders place borrowers into “tiers” based on credit score ranges to determine loan rates.
In addition to your score itself, the factors that make up your credit report and score are important. Your payment history (whether you pay bills on time) and length of credit history can positively or negatively impact loan rates. Too many credit inquiries and high credit utilization can lower your score.
Improving your credit before applying for an auto loan can result in a lower interest rate and potentially save you hundreds or thousands over the loan repayment period. Maintaining on-time payments, lowering credit card balances, and resolving any errors can boost your score.
Average Auto Loan Interest Rates by Credit Score
While rates are dependent on many factors, here is an overview of average used and new car loan interest rates currently offered based on credit scores:
Credit Score Range Average Used Car Loan Rate Average New Car Loan Rate
300-579 (Poor) 14.27% 12.86%
580-669 (Fair) 10.08% 7.58%
670-739 (Good) 6.65% 5.27%
740-799 (Very Good) 4.11% 3.51%
800-850 (Excellent) 3.21% 2.59%
As you can see, consumers with poor credit pay significantly higher interest rates compared to those with good, very good or excellent credit. The difference between a “good” and “excellent” score can mean percentage points on a loan rate. Boosting your score into the next higher tier before getting an auto loan can make financing more affordable.
Many other factors besides your credit score go into determining your actual loan offer, including:
- The vehicle: New or used, make, model, mileage, price
- Down payment amount
- Loan amount requested
- Loan term length (number of months)
- Lender policies and current interest rates
Getting a pre-approval lets you see loan offers tailored to your credit profile and the specific car you want to purchase. Comparing pre-approved rates from multiple lenders can help get your lowest interest rate.
Tips for Getting the Best Auto Loan Rates for Your Credit
While your credit score is a key influencer, there are things you can do to get the lowest rate possible for your credit situation:
Shop lenders: Apply with local banks, credit unions, and online auto loan providers. Compare all offers side-by-side.
Get pre-approved: Pre-approval presents you as a serious buyer and shows the rate you can expect.
Consider a co-signer: Adding a co-signer with excellent credit can lower your interest rate significantly. Make sure you trust them to make payments if you can’t.
Put down a larger down payment: A down payment of 20% or more gives you the best rates on most loans. For poor credit, expect to put down 10% to 15%.
Opt for a shorter loan term: Loan terms over 60 months tend to have higher interest rates. Opt for a 48 or 36-month term if the payments fit your budget.
Look at certified pre-owned: CPO vehicles can offer lower rates than older used cars, even for poor credit buyers.
Boost your credit first: Take steps to improve your credit score before applying for a loan to access better interest rates.
Focus on the total loan cost: While the interest rate is important, also look at factors like fees and the total amount of interest paid over the life of the loan.
With poor credit, expect to put more money down and have fewer lenders to choose from. But decent credit or above opens up many more options for affordable auto loan financing. Knowing what rates to expect for your credit score and taking steps to boost your score prior to getting an auto loan can save you money.
How Auto Loan Terms Influence Total Interest Costs
In addition to your credit score, the other key factor that determines how much interest you pay for a car loan is the loan term. The loan term is how long your auto loan lasts, generally 24 to 72 months for most borrowers. Longer terms tend to come with higher interest rates, while shorter loan terms usually have lower rates.
While a longer car loan term provides smaller monthly payments, you end up paying more in total interest costs over the full repayment period. Let’s look at an example $20,000 5-year new car loan to see how loan terms impact total interest paid:
Loan Term Interest Rate Monthly Payment Total Interest
36 months 3.5% $608 $1,888
48 months 4.2% $468 $2,784
60 months 5.1% $391 $3,660
72 months 6.5% $349 $5,208
As you can see, the longer the term, the higher the rate and the more total interest paid over the lifespan of the loan. Many experts recommend not taking a car loan longer than 48 months if possible. For expensive vehicles, limiting your loan term to 36 months can save thousands in interest while keeping payments manageable.
This example illustrates why it’s important to look at rates AND loan terms when financing a car. Your monthly budget might allow higher payments over a shorter term to save significantly on total auto loan costs.
Improving Your Credit Score to Access Better Car Loan Rates
Since your credit largely determines what interest rate you can qualify for, improving your credit should be a priority before applying for a car loan. Here are important steps to take in the months leading up to your auto financing application:
- Review credit reports from Equifax, Experian and TransUnion to identify and dispute any errors that may be negatively impacting your score. Errors can bring your score down.
- Pay all current bills on time, including credit cards, utilities, rent, car loans and any other payments. Payment history makes up a major part of your score.
- Pay down credit card balances below 30% of the card limits. High balances hurt scores.
- Avoid taking out new loans or credit cards right before an auto loan application. Too many “hard inquiries” for new credit can ding your score temporarily.
- If possible, pay down balances on installment loans like student loans and mortgages to reflect lower utilization. Lower loan balances compared to limits helps credit ratios.
- Avoid excessive credit applications. Each application can prompt a hard inquiry, which can lower your score if too many accumulate. Only apply for loans you need and are pre-approved for.
- Contact creditors about one-time “good will” deletion of late payments if you’ve been in good standing for 6 months or longer. This can help offset score damage from past struggles.
- Build credit if needed. Become an authorized user on a spouse or parent’s account responsibly. Open a secured card if you have no other way to build credit. Limit new accounts to one or two.
- Consider credit counseling if debt and payments are unmanageable. They offer advice and help negotiating with creditors.
- Wait to apply for an auto loan if your credit is poor right now. Give yourself at least 6 to 12 months to implement improvement strategies to access better loan terms.
While building credit takes diligence and patience, the payoff in savings on an auto loan makes it well worth the effort. Take time to implement a credit-building plan in advance of needing a car loan to set yourself up for the best interest rate possible.
Monitor your credit score using a free site like Credit Karma leading up to your auto financing application. Aim for at least a 30 to 50 point boost before applying for financing. Shop lenders and compare all offers once you’re confident your credit situation is the best it can be.
How Much Does Your Credit Score Need to Improve to Get Better Car Loan Rates?
If your credit score falls in the high 600s to low 700s, minor improvements may help you cross into a lower interest rate tier with lenders. Most lenders place borrowers into credit “buckets” in major auto loan rate tiers:
- Top Tier (Excellent Credit): Scores from roughly 720 to 850
- Middle Tier (Good Credit): Scores in the 690s
- Lower Tier (Average Credit): Scores in the 620s to upper 600s
- Bottom Tier (Poor/Fair Credit): Scores under 620
Ideally, you want your score to reach the next credit tier to get the best possible interest rate. Here are some examples:
- If your score is 675, increasing to 700 could drop your rate from 8% to 6%.
- With a score of 710, getting over 720 could reduce rates from 5% down to 3%.
- A 625 score boosted to 650 might get a rate of 10% instead of 14%.
Aiming for about a 30 to 50 point boost is a good goal before applying for a car loan if you’re on the edge of moving up to the next rate tier. Any credit score improvement helps, but targeting the thresholds between tiers can give your rate an extra drop.
For poor credit, scores under 620, even a 50 to 100 point boost only improves your situation marginally. Borrowers with very low scores usually must build credit for 6 to 12 months to see significant rate improvements.
How High a Credit Score is Needed for the Best Auto Loan Rates?
To access the absolute lowest car loan interest rates from most lenders, a credit score over 720 is typically needed, and scores over 760 are ideal. This reaches top-tier, “excellent” credit territory that lenders classify as lowest risk.
Here are some average rate ranges currently available with top credit:
- New car loans: 2% to 4%
- Used car loans: 3% to 5%
- Refinancing: Around 3% to 4% for newer cars
Within the top credit tier, minor score fluctuations only negligibly impact interest rates. Once in the excellent credit range, other factors like the car itself, loan amount, income level and other qualifications become more important.
While excellent credit opens access to the best rates, borrowers can still get reasonable used or new car loan rates in the good credit range between 670 to 719. Good credit earns an average interest rate of 5% to 7% with most lenders, still significantly lower than average to poor credit tiers.
Benefits of Reaching the Top Tier for Auto Loan Rates
Besides the lowest interest rates, getting your credit score into the 720+ top-tier range before applying for a car loan provides other benefits:
- More lender options: You can be choosy about lenders since most will approve top-tier applicants.
- Higher loan approval odds: Excellent credit means virtual guaranteed loan approval from lenders.
- Lower down payment needs: Many lenders will approve loans with little or no money down with top credit.
- Faster loan approval: Excellent scores means loans can be approved in 1 to 2 days without extensive review needed.
- Lower other costs: Top credit means lower fees and down payments insurance costs.
- Higher loan amounts: Good credit may get you approved but lower amounts. Top credit allows bigger auto loans.
- Better loan terms: The very best rates go to shorter 2 to 3-year loan terms which can save substantially on total interest.
- Refinancing options: Excellent credit opens the door to very low auto refinance rates to save money if rates drop in the future.
How to Check Current Auto Loan Rates Online
The average interest rates cited above provide a general overview of what’s currently being offered to borrowers based on credit score tiers. However, actual loan offers are based on much more than your credit alone.
Your personal auto loan rate will depend on:
- The specific vehicle: Age, price, new/used, mileage
- Chosen loan amount and term
- Your verified income and expenses
- Down payment amount
- Debt-to-income ratios
The only way to see accurate rate quotes tailored to your situation is to get pre-approved by lenders. Here are some options for checking personalized auto loan rates online:
Lender Websites
Most banks, credit unions and auto lenders have online applications where you can get pre-approved. You’ll need to provide details on the vehicle, loan amount and your financial information. Here are some top lenders to consider:
- Capital One
- Bank of America
- Chase
- Wells Fargo
- PNC Bank
- Local credit unions
Rate Aggregator Sites
Third-party websites like LendingTree and MyAutoLoan allow you to complete one application that they send to their lender network to retrieve multiple, real pre-approved offers:
- LendingTree
- MyAutoLoan
- CarGurus (New car loans)
- AutoApprove (For poor credit borrowers)
Comparison Sites
Resources like NerdWallet allow you to compare average interest rates and lender profiles. They also provide auto loan calculators without having to officially apply:
- Nerdwallet
- Bankrate
- ValuePenguin
Getting pre-approved rates from 3+ lenders gives you negotiating power to secure the best rate once at the dealership. Having top-tier credit qualifies you for the lowest rates, but you still need to put in the work shopping lenders and loans.
Key Takeaways on Credit Scores and Auto Loan Interest Rates
Your credit score impacts what interest rate you pay for an auto loan more than any other factor. Scores under 620 lead to double-digit rates, while 720+ scores access the lowest rates usually under 5% APR. Improving your credit before buying a car can mean big savings on your loan.
Other factors impact rates like your down payment amount, loan term length and the vehicle itself. But your credit sets the baseline for the rate tiers you will be offered. Excellent credit opens doors for the best loan terms and lowest rates.
Shop multiple lenders and compare pre-approved offers once your credit is in top shape before applying for a car. Look at total interest costs over the loan repayment period rather than just the monthly payment.
While poor credit leads to fewer options, scores in the fair to good range (640 to 719) can still qualify you for reasonable used car loan rates under 10% at many lenders. Do your due diligence to find the best deal possible for your situation using the tips provided above.
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