How your credit score affects your car loan

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Sep 28 2022

How your credit score affects your car loan

Shopping around for a car might feel like a new beginning, whether you prefer sensible minivans or flamboyant sports cars. The issue is that the majority of people cannot afford to pay cash. How can you investigate auto loan possibilities to make your motorized fantasies a reality? Future headaches—and debt—can be avoided by fully understanding all of your financing alternatives and how to maximize your money.

The Average Auto Loan Interest Rate and what can affect it 

The average interest rate for US vehicle loans is 5.27% on 60-month loans, according to Loan-faq.com. Rates, however, are dependent on various criteria, including a borrower’s credit score, the loan’s term, the age of the vehicle being financed, and other elements that affect the lender’s risk in making the loan. The typical annual percentage rate (APR) range for auto loans is between 3% and 10%.

The type of automobile you’re buying, where you reside, and your credit score are all taken into account when dealers determine your interest rate. You can find auto loans at a dealership or by obtaining pre-approvals from companies you’d like to do business with, such as banks, credit unions, or private lenders.

How credit scores affect your car loan interest rate

When applying for a loan, consumers with credit scores of 760 or better are regarded as good candidates and may be approved at interest rates as low as 3%. In contrast, people with lower scores are seen as riskier investments by lenders and typically face higher interest rates, up to 20%. A consumer’s poor financial history, which may include missed payments, defaulted debts, or bankruptcy, is indicated by scores under 580.

Consumers with good credit often pay interest rates below the 60-month average of 4.21%, while those who need to improve their credit should prepare to pay significantly higher rates. The average credit score of people who get vehicle loans is 711 points. Customers in this area could anticipate paying rates that are close to the median of 5.27%.

Credit scores tell lenders how risky it is to grant a loan to an applicant when combined with other elements important to that applicant’s request for an auto loan, such as liquid assets, the price of the car, and the applicant’s total capacity to repay the loan amount. FICO credit scores, which range from 300 to 850, are calculated by looking at a person’s credit payment history, their total amount of debt, and how long they’ve had a credit line open.

How to use average car loan interest rates

You can use a car payment calculator to determine the estimated monthly payment for different loan periods if you are aware of your credit score and the typical auto loan interest rate you may be eligible for.

Until you apply for a car loan and receive lender offers, you won’t know your exact rate, but you’ll have a basic concept of it. Longer-term loans typically have higher interest rates than short-term loans. Get rates from various lenders and compare them to make sure you’re getting the best price.

Where to find the best auto loans

You have a wide range of choices on how to find the best vehicle loan.

  • Banks. Your bank might provide one of the most competitive interest rates if you already work with them and have a good credit score. But before you sign, make sure to read the entire contract; some banks include language allowing them to withdraw funds from your checking or savings account.
  • Credit unions. If you’re a member of a credit union, it might provide a competitive interest rate, similar to a bank. Additionally, a credit union might be willing to overlook less-than-perfect credit and still offer a competitive rate if you have it.
  • Online lenders. You may prequalify for vehicle loans from a number of internet lenders. You’ll probably receive a better rate by applying directly rather than through a dealership, as with the majority of direct lenders.
  • Car dealers. One of the main ways to end up with a higher interest rate is in this situation. You will be forced to pay more than you would if you went directly to the lender due to markups added by dealers to the offered interest rates. To get the greatest bargain, call a few different lenders before visiting a dealership..

The bottom line

Borrowers with nearly perfect credit ratings are often the ones who can get low vehicle loan rates. While knowing the average rates is useful background information, you cannot always count on receiving the number corresponding to your credit category.

You can prequalify with lenders online and offline to discover what kind of rates you’re eligible for, regardless of whether you know your credit score or not.

If you’re in Michigan and need help navigating the car loan market, We’re here to help. We invite you to experience our superior personal service, an extensive selection of high-quality financial products and services, creative approaches, and dedication to your long-term financial security for yourself.

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