What Is a Good Interest Rate for a Car Loan?
Generally speaking, the average interest rate for a US car loan is 4.21%. This is based on a 60-month car loan. Such a car loan interest rate is fairly standard. However, an individual’s interest rate will differ according to their credit scoring, the general length of the car loan and also the age of the vehicle that you are financing. There are also other factors that will be taken into consideration when a lender is assessing the risk and considering the car loan interest rate.
A consumer with a high credit score of, say, 750 or above, would be seen as a prime car loan applicant. Such buyers would tend to be approved for car loan interest rates as low as even two or three percent. That said, those consumers who are burdened with a low credit score will be deemed as a more risky affair, and therefore lenders will usually offer them a higher rate of interest. A scoring on your credit report of 580 or below could indicate that a consumer has a bad financial background – they may have paid off debts too late, defaulted on debts, they could have even filed for bankruptcy; those in the “subprime” category may even have to pay car loan interest rates that are up to ten times greater than that of prime consumers. This is going to be the case if they are taking out used cars or car loans that are set over a longer term.
A consumer with a really good credit rating would usually pay car loan interest rates under the sixty month average of 4.21%. Those who have poor credit will have to pay much higher rates. The “meridian credit score” for a consumer who wants to take out a car loan is 706. Those sitting in this bracket can be looking at interest rates in the area of the 4.21% average. If other situations of relevance to the car loan application are considered – liquid funds, the actual cost of the vehicle, the general ability of the consumer to pay off the loan, the credit scoring would be a signal to a lender about the level of risk that would be involved should the lender decide to offer a car loan.
What is the “Meridian Credit Score”?
The average “meridian” credit score in the USA is seeing a rare high of 695. Although a number of different scoring models are used, and these can mean that this figure does change by a point or so, most of the models do sit between 660 and 720. This is considered to be “prime” – an average scoring.
About 15% of the US population actually has no credit rating at all. These consumers are classed as “credit invisible”, and, consequently, these people will have real issues trying to get a car loan or a line of credit of any kind.
The lender will rate the credit scoring in different categories. These segments will show just how risky it might be if they do grant a line of credit to a particular consumer. In addition to playing a key part in obtaining approval for loans or credits, these scorings can also have a negative influence on the terms which are offered. One of the most significant terms to be considered here are interest rates.
We often see credit scores broken down as follows:
- +720 = excellent
- 660 – 719 = average
- 620 – 659 = poor
- -620 = bad
Average Interest Rates Assessed by the Length of Term
The majority of banking establishments and credit companies will give you a payment schedule that could range from 24 to 72 months. A shorter term car loan will usually incur lower interest rates. Generally speaking, the usual term for a car loan is 68 months, and car loans around 72 and 84 months are also becoming a fairly familiar sighting these days. However, the greater APRs of those longer term car loans can cause exorbitant interest fees and could leave the consumer in an “upside down” state; owing more on the car loan than the vehicle actually costs.
On average, a car loan term of 36 months will have an average interest rate of 3.71%, a term of 48 months would have a 3.78% interest rate, a car loan term of 60 months would generally have a 3.81% interest rate, and a car loan term of 72 months would probably see a rate of around 3.93%.
Although a car loan term that is longer will provide for a lower payment each month, those additional months of adding on the interest can eventually overbalance the advantages of the lower short term cost – especially if the consumer has bought an older car, the value of which will then depreciate more quickly. You’ll also find that loan terms of around 72 and 84 months tend to only be provided for larger loan figures or for new models.
Average Interest Rates for Car Loans in Terms of Lender
The type of loan you’ll be offered will vary depending on the classification of lender. Choosing the right lender for you could help you obtain much lower rates. You’ll find that the big banks tend to lead in the area of car loans. That said, credit unions can provide consumers with the lowest APRs. So it’s worth checking out all the options.
Banks that offer car loans tend to give similar rates as low as 2 or 3 percent to customers who are deemed the most qualified. But banks differ considerably when it comes to the highest permitted APR. Top rates can range from something as low as 6% to a rate as high as 25%. The banking institutions that offer higher rate loans will invariably take on applicants who have poor credit, as those institutions that are more tentative about risk will not offer loans to those with scores that are below the 650 mark. Your average large-scale banking establishment will have very specific requirements for eligibility when it comes to car loans. These will usually include a maximum mileage and age of the car.
On a whole, credit unions will provide car loans at lower interest rates than most banks, and they are more flexible when it comes to payment plans. They also expect a lower loan minimum (or, in some cases, none whatsoever). That said, the average credit union will have a tendency to offer loans only to those in their membership, so this can often be limited to specific areas, occupations or even social affiliations and associations.
Dealerships like Ford, Honda etc. will also offer car loan financing options for new vehicles that have been purchased from their own salesrooms. This sort of finance option has seen an increase in popularity amongst those buying new vehicles, and actually makes up around half of all car loans out there. Car manufacturers offer baseline APRs which can even be as low as 0% so as to compete with the more customary financial institutions such as banks and credit unions – but it also provides an incentive to consumers to buy a brand new car off the peg rather than opt for a second-hand vehicle from a different supplier. The low car loan interest rates are limited to the most approved consumers with top notch credit scores. Car manufacturers will not necessarily offer loans to everyone – the consumer must first be approved in accordance with the specific criteria of the car manufacturer.
Does the Interest Rate Differ Depending on the Age of the Car?
Somebody looking up figures on a laptop.
When we look at interest rates for cars, it’s evident that the interest rates for second-hand cars are invariably higher than those for loans on new vehicles. The higher interest rates for a used car reflect the greater risk of lending funds for an older and therefore may be much less reliable car. The majority of banks won’t even provide finance for used cars that have reached a certain age. It’s rare to be offered finance for a car that is eight years old, for example. Any loan offered for an older model will usually come with a much greater APR.
We are seeing an historical low as far as car loan interest rates are concerned. This is the result of a generally low interest rate environment. The average interest rate on a two-year car loan from a general banking establishment has seen a 40% fall over the past ten years. This can be attributed to the financial crisis back in 2009. After this, the interest rates were reduced as an incentive to consumers to try and give the economy a kick start and to make people spend money on things like cars and houses instead of saving their incomes.
It is also true that loan plans from car finance establishments have always had lower rates than those from a general commercial bank. The big-named car producers such as Ford and Chrysler have a lot of sway and offer umbrella finance, and they can provide car loans to consumers who are purchasing the main company’s vehicles: this means that car makers can offer lower interest rates, as it is the car procurement as opposed to the actual interest that is considered to be the manufacturer’s main source of income.
Is This a Good Year for Car Loan Interest Rates?
Trying to get the best possible car loan interest rate when you are buying a new or even a used vehicle is critical. If you look at the cost of the vehicle and the term, it’s the interest rate that could save or cost many hundreds, even thousands, of dollars when considered over the full term of the loan.
2019 saw the average new vehicle loan reach a figure in excess of §31,000. This means it’s more crucial than ever before to find the best possible car loan (at the very best interest rate) before you even consider buying a car. You need to find a lender that offers a broad spread of loan types, can give you a speedy approval, good consumer service and also the best possible car loan interest rates.
It doesn’t matter if you approach a standard high street bank or check out an online lending establishment, the best possible car loan for you personally will depend on your own individual circumstances. There are lenders out there who offer fantastic lines of credit, and then there are those who you’d probably go to if you have a less than brilliant credit scoring. If you do have poor credit, you will also need to find a lending agency that is better suited to your particular circumstances.
So How Can I Get the Best Possible Car Loan Rate?
It pays to shop around before you even set foot in a dealership’s salesroom. You should never think that the dealer is going to offer you the best possible interest rate. This is even more the case if you don’t have a very good credit score.
You must know your credit score. Find out where you stand as far as your credit rating is concerned before you consider buying a car. Fantastic credit will mean a better rate, and poor credit will mean a much higher interest rate – and sometimes you won’t be approved at all.
Take the shortest term loan possible. You will pay much less in the long run if you can condense your payments into a much shorter period.
You will get a better interest rate if you buy new, but you do need to weigh up all the pros and cons here.
Don’t add on any extras with your loan figure. All dealers will offer you new “features” and extra bits and bobs. They are rarely required, and you shouldn’t go adding them to your loan amount.
Take advantage of interest rate discounts, and do consider some of those 0% deals, but make sure you’ve researched the plan beforehand. If you’re still in doubt about anything, don’t hesitate to get in touch with our team today at Auto Loan Solutions.