You’re in the market for a loan and want to know if your credit score is good enough to get approved for a car loan. It depends on the lender. Some will approve you with a lower credit score and higher interest rate. Others could deny you a loan or require a hefty down payment on top of the steep interest rate to approve your loan application.
What Is a Car Loan?
A car loan is a financing arrangement between the lender and the buyer. The lender, typically a bank, or credit union, agrees to lend the borrower the funds needed to purchase a vehicle in exchange for monthly principal and interest payments over a set period.
How Does a Car Loan Work?
Auto loans are secured, and use the vehicle as collateral. They generally come with loan terms of 36, 48, 60 or 72 months. The borrower is obligated to make the required monthly payment over the loan term or risk the car being repossessed by the lender.
To illustrate how a car loan works, assume you want to take out a 60-month $40,000 auto loan. The lender approves you for a loan with a 4 percent interest rate. So, you’ll pay $737 per month for 60 months, and the loan will cost you $4,200 in addition to the $40,000 purchase price.
How Does Your Credit Score Affect Car Loans?
Your credit score is a significant factor in determining what interest rate you’ll qualify for. The best interest rates are generally reserved for people with good or excellent credit. But if your credit score is low, you could get a much higher interest rate to offset the risk you pose to the lender. In some instances, you could be denied an auto loan.
Average Car Loan Rates By Credit Score
Here are the average car loan rates by credit score per Experian:
- 781 to 850: 2.47 percent (new car), 3.61 percent (used car)
- 667 to 780: 3.51 percent (new car), 5.38 percent (used car)
- 601 to 660: 6.07 percent (new car), 9.8 percent (used car)
- 501 to 600: 9.41 percent (new car), 15.96 percent (used car)
- 300 to 500: 12.53 percent (new car), 19.87 percent (used car)
Ways to Secure Lower Interest Rates in a Car Loan
1. Improve your Credit Score
A higher credit score means you’ll qualify for more favorable loan terms, assuming you earn enough to afford the monthly auto loan payments. Visit Annualcreditreport.com and get a free copy of your credit report from the three major credit reporting agencies – Experian, TransUnion and Equifax. If you notice any errors, file disputes promptly with the credit bureau, reporting the inaccurate information as it could be dragging your credit score down.
Also, bring any past-due credit card and loan accounts current, as payment history has the biggest impact on your credit score. You also want to make timely payments on your bills and debt accounts moving forward, pay the balances on your credit cards down, and only apply for new credit as needed to help improve your score.
2. Save for a Down Payment
You could be offered an auto loan with no down payment required. However, putting money down means you’ll likely get a lower interest rate, especially if you have less-than-perfect credit.
3. Consider a Co-signer
Do you have a relative or friend with excellent credit? If they’re willing to co-sign on an auto loan for you, the chances of getting a low interest rate are much higher.
4. Compare Different Lenders
Don’t settle for the first lender you find. Explore auto loan options from several banks and credit unions to ensure you get the best deal on financing.
How to Access Competitive Rates When Refinancing Your Car Loan
There’s no shortage of lenders who offer auto refinance loans. Unfortunately, finding the best deal can be challenging if you’re crunched for time or don’t quite know where to look.
