Used car loan interest rate: what to expect when buying a used vehicle
How to make an educated decision and pick the best lender that fits your needs.
If you’ve been keeping up with our blog posts, you probably know that when it comes to interest rates of any kind, there is rarely a “one size fits all” formula to know what to expect. However, understanding the factors that will determine the terms of repayment makes it much easier to be prepared. This same concept applies to buying used vehicles.
We have gathered the main factors that affect your auto loan interest rate and how to prepare when shopping around for a used car.
What factors determine my auto loan interest rate?
CarsDirect.com explains that there are 5 factors that will determine what your interest rate will be:
Lender: Much like deciding on what car to buy, the internet can certainly be deceiving as it will promote loans that are not necessarily right for you. When deciding on who to go with, research will be key as different lenders offer different discounts depending on whether you have accounts with them and the amount you’re wanting to borrow. A good idea is to always talk to a professional instead of just sending an online loan application. Financial specialists will be able to explain the fine print and your terms of repayment before making a commitment.
Credit score: It shouldn’t come as a surprise that your credit score is a big determinant when it comes to interest rates, as it is an indicator of your past financial behavior, whether you’ve been making on-time payments, how many loans you have taken out, the status of your credit card debt and your debt-to-income ratio. Generally speaking, the three main credit bureaus in the United States, TransUnion, Equifax, and Experian, define credit scores as:
- 300 – 579: Very Poor
- 580 – 669: Fair
- 670 – 739: Good
- 740 – 799: Very Good
- 800 – 850: Exceptional
If you’re concerned about a low credit score, make sure to take a look at this Experian article on what could be hurting your credit score and a few easy steps you can take to improve it.
Vehicle selection: The downside of buying a used car is that they tend to have a higher interest rate than brand new ones. Before falling in love with a car, make sure to do your research and find out how much your interest rate will vary if you were to choose another make or model.
Down payment: The concept of a down payment is easy to understand, as the more you pay off the bat, the less you’ll have to pay down the road and the fewer interests you’ll end up paying as well. Keep in mind that when financing a car, your down payment could be anywhere from $1000 to 10% of the total, so be prepared to spend a fair amount of money at the beginning.
Click here to find out how you can develop a budgeting strategy and start saving for that down payment!
Loan term: “Most banks and credit unions provide payment plans ranging from 24 to 72 months, with shorter-term loans generally carrying lower interest rates. The typical term length for auto loans is 68 months, with loans of 72 and 84 months becoming increasingly common. The higher APRs of longer-term auto loans, however, can result in excessive interest costs that leave borrowers ‘upside down’—that is, owing more on the auto loan than the car actually costs,” explains valuepenguin.com
What’s the average auto loan interest rate?
The same valuepenguin.com explains that “the national average for US auto loan interest rates is 4.21% on 60-month loans. For individual consumers, however, rates vary based on credit score, term length of the loan, the age of the car being financed, and other factors relevant to a lender’s risk in offering a loan. Typically, the annual percentage rate (APR) for auto loans ranges from 3% to 10%.”
What are other considerations?
When shopping around for cars, it’s good to remember that your monthly car payment and your interest rates are not the only payments you’ll be making after your purchase. If you truly want to have an idea of how much you’ll pay each month, make sure to write down all the expenses associated to your new vehicle so you can properly budget and avoid getting behind.
LendingPoint is a personal loan provider specializing in NearPrime consumers. Typically, NearPrime consumers are people with credit scores in the 600s. If this is you, we’d love to talk to you about how we might be able to help you meet your financial goals. We offer loans from $2,000 to $25,000, all with fixed payments and simple interest.