Chances are, if you are buying a new vehicle, you’ll have to figure out car financing – whether it is with your local bank, finance company or credit union. Finding an affordable finance agreement is usually started by finding a lower interest rate. The higher your car loan interest rate, the more you are paying monthly. The interest rate is the amount of the loan equaling the interest that you’ll pay on the total amount financed.
How Your Interest Rate is Determined
Your credit score can impact how much you will pay for the car loan. The better your credit score, the lower your interest rate. The credit score is used by the lenders because they gauge the rsik they take by lending you money. They want to make sure that you will make payments on time and not default your loan. If you have a bad credit score and they suspect that you will do those things, they will charge you are higher interest rate. Improve your credit score, and your interest rate will lower.
Your credit score is a major factor in determining your car loan interest rate. Some things that will influence your credit score are late payments, a foreclosure, a recent divorce, any defaulting on loans, high credit card balances and more. Here is a rough estimation of car loan interest rates that lenders will charge borrowers on different credit scores:
- 740 – 850: this is a great credit score, and the average interest rate would be around 3.5%. Depending on certain models of cars, the manufacturers will offer interest rates between 0.9% and 1.99% for buyers who have excellent ratings.
- 680 – 739: this is considered to be the average credit score. For a buyer whose score is in this range, the typical interest rate would be around 4.5%.
- 680 and below: this is considered to be a bad credit score, and should be avoided and/or improved. The interest rates of this score can vary from 6.5% to 12.9%. However, this is just an average, some interest rates will be higher for those who have a credit score in this range.
The interest rates can vary from one individual/place or another. It is possible to get a better interest rate if you explore various options and shop around. However, it is advised to be cautious against doing so because applying for credit in multiple places over a short period of time can do more harm than good by lowering your credit rating – so be careful in how you apply for a loan or a credit card.
The best step of action is to find out what your credit score is, and take steps in improving it (if needed). Make the process of buying a car easier.