The average interest rate for a car loan depends on your credit score, what car you’re buying and some other factors which I’ll be explaining as we go on. Interest rates is one thing you cannot avoid when going for a car loan because that is what lenders charge for lending you their money.
However, in as much as you cannot avoid it, you must also ensure that you are not exploited by your lender. Therefore, it’s best to know what rates to expect before agreeing to an offer.
But before we look at the current average interest rate for a car loan, let us first look at the determinants of an interest rate for a car loan.
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Determinants Of Interest Rate For A Car Loan
Here are the factors lenders consider when charging interest rates:
The credit score of a borrower is undoubtedly the main determinant of an interest rate for a car loan. Your credit score is what lenders use to determine if you are capable of paying back the loan.
The higher your credit score, the lower your interest rate and the lower your credit score, the higher your interest rate because then your loan will be considered too risky. Lenders are likely to also look at your credit history to check if you took other loans in the past and how you managed to pay them off.
Type of Car
The type of car you are buying ie. New or Used will also determine what interest rate you are offered. Generally, interest rates for New cars are lower than Used cars.
Hence the average interest rate on Used cars are higher as compared to New cars. This is because used cars have started to depreciate and may begin to develop faults soon hence increasing the risk level.
The duration of your loan also affects the interest rate you’ll be offered. Interest rates for longer term loans are usually higher than short term loans.
Although your monthly payments will be lower for a longer term loan, you will end up paying more in interest by the end of the loan term.
Another thing that affects your interest rate is the down payment you make. A zero down-payment may look like a good idea. However, what many do not realise is that, by making a down-payment, you are reducing your loan principal which in turn reduces your risk level hence reducing your interest rate.
So the higher your down-payment, the lower your chances of getting a lower interest rate. If you don’t have cash, you can also trade in your old car if possible.
Interests rates usually vary from lender to lender. Hence the lender you choose to borrow from may determine what interest rate you’ll be offered.
All lenders have different ways of arriving at an interest rate for a client. So as a driver wanting to go for a car loan, one of the things you can do is to shop around a few lenders to find out about their rates before deciding on which one is best for you.
Average Interest Rate For Car Loan
As mentioned earlier, there are certain factors that determines the kind of interest rate you get. However, these averages should give you an idea of what to expect on the market.
Using Experian’s 2021 report on the State of the Auto Finance Market, the average interest rate for a Used car is around 3.86% whereas that of a Used car stood at about 8.21%. But you should also note that these averages also differ based on the credit score of a borrower whether it is a new car you’re buying or a used one.
Buying a brand new car with a credit score between 781 to 850 could get you an interest rate of 2.47%. Whereas the same range of credit score could get you an interest rate of 3.61% for a used car.
Tips On How To Lower Your Interest Rate For Car Loan
Aside being able to get a car loan, one of the things alot of borrowers will and should look out for is to get the lowest interest rate possible. And to get that, there are certain things you can do to increase your chances of getting the best interest rate for your car loan.
Here are a few tips:
Improve Your Credit Score
The importance of credit score when it comes to determining your interest rate cannot be overemphasized. It is undoubtedly the major determinant and as such you must try to have a good credit score before applying for your car loan.
If your credit score isn’t good enough, then improve it because the lower your credit score, the higher the risk of your loan is to the lender hence pegging your interest rate higher. So the higher your credit score, the lower your interest rate, all other things being equal.
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Consider Shopping Around
One of the best tricks on getting the best interest rate for your car loan is to shop around a few lenders and dealers to find out what their rates are. This helps you to compare their rates before you finally choose which one is best for you.
By shopping around, you get a fair idea of what competing lenders are offering hence putting you in a position to negotiate for the best rate at your chosen lender.
Make a down-payment if you can and it should be huge enough. This is because the larger your down payment the higher your chances of getting a lower interest rate.
The down payment reduces how much you have to borrow which in turn will reduce your interest rate.
Use a Cosigner
You can also apply with a cosigner if your credit score isn’t good enough. Applying with a cosigner does not only increase your chances of getting approval but also gets you a better offer than you would have gotten if you applied alone.
So if your credit score is not good enough to get you a good interest rate, you may want to find a cosigner with great credit score so you can reduce your interest rate.
Shorter loan term
Going for a shorter loan term reduces your interest rate although it will mean that you’ll have to make higher monthly payments. A longer loan term will reduce your monthly payments but will result in you paying more in interest by the end of your loan term.
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You cannot avoid interest rate on your car loan. However, you can reduce it to the barest minimum if you go by the tips provided above.
Additionally, the best lendes to get the best interest rates are banks and credit unions. Auto dealerships usually offer higher rates than banks and credit unions. So you may want to start shopping from a credit union or bank before resorting to a dealership.
However, you must also note that the credit score requirements for banks are more rigid than auto dealerships.