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Interconnection of credit rating and an average car loan rate of interest

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Facts and figures regarding percentage rates

The average US percentage rate is of 5.27% for auto loans with the 60-month term. However, rates for individual consumers vary according to their credit history, a loan term, a financed vehicle's age as well other factors that affect the lender's risk for a loan offering.

Interconnection of credit rating and an average car loan rate of interest

Note! Commonly, a per annum percentage rate is between 3% and 10%.

Average rates according to credit history

Average rates with excellent credit rating

The rates on car loans when credit rating is 750 points or more:

  • >2,49% for a new vehicle
  • >2,74% for a used car
  • >2,39% for refinancing

The score of 750 and above is considered to be of an excellent level. Lenders perceive such customers as of very low risk and therefore lower rates of interest are charged. In case a borrower's credit rating is within this range then it is possible to qualify for financing concessions and loan deals offered by car manufacturers. These deals can be funded from 0% and thus, potentially allowing to save vast sums.

Average rates for good credit rating

The rates on car loans when credit rating is 700-749 points:

  • >2,49% for a new vehicle
  • >2,74% for a used car
  • >2,39% for refinancing

Loan suppliers believe that clients having the score in the range of 700-749 points belong to the group of a fairly low risk. Despite being typically charged interest below an average level by various lenders, such customers are unlikely to be eligible for finance offers from car companies with the interest of 0%.

Average rates for fair credit rating

The rates on car loans when credit rating is 600-699 points:

  • >2,49% for a new vehicle
  • >2,49% for a used car
  • >2,74% for refinancing

Having credit rating of 600 can makes funds borrowing unbeneficial. But rates on auto credit refinancing still remain relatively low. This means that purchasing a car with the help of loan with a high percentage rate a customer is able to refinance is and save money as soon as some capital is accumulated.

Average rates for bad rating

The rates on car credits when credit rating is 451-599 points:

  • >3,49% for a new vehicle
  • >6,76% for a used car
  • >7,01% for refinancing

Customers with bad credit scores are called subprime borrowers. People with subprime loans are considered to be at a higher risk of credit default. As a result, creditors offer higher percentage rates to such customers for protecting themselves against losses. Moreover, some banks even don't provide services to borrowers within this credit scoring range.

Car loan middle rates for deep subprime credits

It may be difficult for borrowers with subprime lending of a high level to find a vehicle loan lender. Provided they will manage to do it, they are likely to be offered extremely high percentage rates that can add thousands of dollars to the car's total cost and make monthly payments hardly bearable.

Average percentage rates by maturity

A lot of banks along with credit unions usually provide plans of payment with the range from 24 to 72 months as well as lower rates for loans of short term.

Note! The typical term for car credits equals to 63 months but currently credits of 72 and 84 months are getting more common.

However, long term loans's higher per annum rates can cause excessive interest costs and which in turn will result in exceeding the loan debt over the vehicle's actual value.

Despite a credit of a longer term allows lower monthly charges, the benefits may be ultimately overweighed by additional months of interest accumulation especially when a used car has been purchased because its value will depreciate rapidly.

72 and 84 months terms are typically available only for large credit amounts or for new vehicle models.

For example, a $ 25,000 loan at a rate of interest of 4.5% is being repaid within 48 months and it would result in monthly installments of $ 570 and also a total cost that equals to $ 27,364. Reimbursable during the 84-months period with monthly payments of $ 348 the identical loan at the same rate will appear with a total cost of $ 29,190, that is over $ 1,800 more compared to a 48-month term credit. With higher percentage rates applied, short and long term installments will differ even greater.

Mean rates on auto credits by loan providers

Percentage rates can vary significantly depending on a lending company thus, choosing the right one can help obtain a rate of the lowest level.

Important! Large banks are the main auto loans providers. Meanwhile, credit unions generally grant customers per annum rates of the lowest level as well as car manufacturers offer keen financing options for new vehicles.


The majority of issuing banks provide the similar rate of 3% to their most qualified customers. But the maximum allowable per annum rate of interest differs considerably with a bank, upon that the maximum rates are ranged from 6% to 25%. Applicants with bad credit scores are primarily proposed with higher rates loans while more cautious loan suppliers are likely not to provide service to applicants with a score below mid-600 points.

Note! Large banks normally have specific loan requirements which include maximum mileage and age for vehicles as well as a minimum credit amount.

Credit unions

Most commonly, credit unions issue lower percentage rates loans than banks, more flexible schedules of payment are afforded and minimum loan sums of a lower level are required or in some cases are not required at all. Still only credit unions' members can get loans and that is often limited to specific professions, locations or public associations.


Options for new vehicles loan financing are granted by such car manufacturers as Ford, Honda and GM in case of a car purchasing at their dealership centers. This financing type is gaining popularity among buyers of new cars and currently contributes about 1/2 of all auto loans. A base percentage rate per annum that carmakers offer is of 0% to 0.9% in order to compete with such traditional creditors as banks along with credit unions and to encourage customers to buy new cars at dealerships rather than used ones from other suppliers. Only clients having with excellent credit reputation are able to qualify for low rates and not all applicants will get approval for obtaining such a loan.

The ways how average percentage rates on credits for new and used vehicles change

Average rates for used vehicles are typically higher than those for new ones. Used vehicles' higher rates is the result of a loan's high risk because the car is older and thus, potentially less reliable. It is not a rare case when loans are not issued by banks if a used vehicle is over a certain age (typically 8 or 10 years old) and credits for older cars are frequently accompanied by much higher per annum rates. While one of major banks offers a good rate starting from 2.99% for a new car purchasing, the same credit minimum rate for a used model bought at a private seller increases to 5.99%.

Standard lenders allow substantially less loans for used vehicles than for new ones, more precisely, an average amount borrowed for used cars is equal to $ 20,446 while for new ones is $ 32,480. Moreover, credit term for used vehicles is generally between 48 and 60 months, as the potential risk of a car's breakdown increases correspondingly to the age.

The ways low rates on car credits help save money

Let's consider various abovementioned car credit rates and see their effect on possible savings. As an example we will take a new vehicle loan with the 5-years term and the amount of US $ 28,800 (which is the sum remaining for financing followed by a downpayment of 20% for the new car's middle price of $ 36,000). Applying the 2.49%, average rate of interest designed to clients with top-notch credit score results in $ 1,808 in percentage payments. Customers having good and fair credit history are also provided with a percentage rate of 2.49%. At the 6.76% new car average rate intended for people with bad credit scoring the total sum of interest is $ 5,076 and that's about $ 3,200 additional cost compared to the one clients with high credit rating would pay.

Let's consider a loan for used cars. With the credit amount of $ 16,000 borrowers excellent, good or fair credit scoring and provided an average percentage rate of 2.74% and the 5-years term will reimburse $ 1,139 in interest. A client having poor credit rating are like to receive a rate of 7.01% which is nearly three times higher than that one for customers with higher creditworthiness and thus, will have to cover $ 3,014 in interest.

The reasons for high rates of interest on car loans

These rates are determined by two major factors: the percentage rates on credits established by the Federal Reserve and credit rating.

Attention! Buying a car is cheaper when low rates are maintained by the US Federal Reserve.

The next issue is the impact of a client's credit rating on an car loan rate of interest that has to be redeemed. With good credit rating a customer is eligible for a lower percentage rate. The idea of interest is that it is basically rent for funds borrowed. For a vehicle buying a client borrows an amount of money required for such a purchase and interest will be charged by a lender. Thus, a bank can make a profit and receive more money back provided a client doesn't repay the loan.

People with low credit score are believed to less likely reimburse borrowed funds. Late payments on credits and other bills, high debt levels or previous loan non-repayment are the factors contributing to a credit rating of a low level. All them indicate that the borrower has problems with money management.

Loan type and duration are also in the list of factors affecting rates of interest. Higher rates are applied to credits for used vehicles than for new ones because of used cars' lower resale value. In case such a loan is not redeemed the lending company will possess an asset of a lower value to sell. Thus, more interest is charged in order to protect banks and guarantee they will get more funds back in case the loan defaults.

A rate of interest is also affected by a loan term. A longer term leads to lower monthly installments but it also means the extension of repayment period. Percentage rates of higher level allows bank to receive more money back in the event of default on the credit.

How to obtain a low percentage rate on a car credit

Credit rating improving is the best way to lower a percentage rate. It may take a while, but the rating will go up thanks to timely paying bills and reducing the payment-to-income ratio. Having higher credit rating enables a client to qualify for lower rates and save money on a car purchasing.

Once having credit rating improved it is worth searching car loan rate quotes. Getting them from multiple lenders allows to choose the most appropriate one for saving money. With the information that such quotes contain a client is able to know the amount of interest to be paid before visiting a car dealership. Without having an idea what rates a client is qualified for it is difficult to know if the dealer grants a good or bad financing deal. Financing offers gives the dealer the ability to propose a convenient percentage rate if they want to cooperate with the client.

Money can also be saved by selecting a shorter loan term or investing more funds in a vehicle and this will reduce the amount of money to be borrowed.

If credit rating cannot be arisen enough for obtaining the best rate by the moment of a car purchasing a customer can get a higher rate credit, make payments and try to refinance the loan to a lower rate. Although still more funds will be spent on interest compared to having a lower rate initially, a customer will still likely redeem less than if the loan with the higher percentage rate had been kept for the entire term.

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