An APR (Annual Percentage Range) for a car loan depends on various factors including your credit score. To find a favorable APR for a particular credit score, you first need to understand the effect of your credit health on the interest rate and other terms in auto loan agreements. Moreover, knowing other factors that can influence your car loan rate is also essential to determine if you stand a good chance of getting a loan and at what rate.
In this blog, we will explore the relationship between credit score and APR while also discussing other factors that lenders often consider when determining a borrower’s car loan rate. Read on to be better equipped to make an informed decision about your car financing options.
What is APR in Car Financing
An annual percentage rate or APR refers to the cost of your loan, which includes the interest rate along with all other fees involved in taking out the loan. Your auto loan APR is largely dependent on your credit score, however, other factors such as the lender, the total amount of the loan, and the length of the loan, may also influence it.
Relation Between Credit Score and APR
Your credit score is an important factor in determining the cost of your car loan. Generally, the higher your credit score, the lower your auto loan cost or annual percentage rate (APR) will be. Most lenders consider those with 670 and above as acceptable or low-risk borrowers and offer them car loans at good interest rates.
If your credit score is below what is considered acceptable, you can still get auto loans but with higher interest rates, leading to high monthly payments and PAR. This is because lenders usually view bad credit scores as a sign of more risk. On average, bad credit borrowers qualify for rates in the double digits, however, the exact rate will depend on various factors including the lender you choose and the method they use to evaluate your creditworthiness.
The Average APR for Bad Credit Car Loans
The exact APR of your auto loan will be determined based on your credit score, the vehicle you want to purchase, the lender you choose, and other factors. However, some estimates such as the average auto loan interest rates presented in Experian’s State of the Automotive Finance Market Report from the second quarter of 2024 can help set realistic expectations and avoid surprises.
Here are the average interest rates for both new and used car loans for different credit scores:
- Super prime (781-850): Around 5.25% for new cars and 7.13% for used cars.
- Prime (661-780): Around 6.87% for new cars and 9.36% for used cars.
- Nonprime (601-660): About 9.83% for new cars and 13.92% for used cars.
- Subprime (501-600): About 13.18% for new cars and 18.86% for used cars.
- Deep subprime (300-500): About 15.77% for new cars and 21.55% for used cars.
The above statistics show that your credit score can greatly influence the interest rate you qualify for, the monthly payment you will pay, and the total car loan cost you can expect. If your credit score is above 780, you have the best chance of getting the lowest interest rate. However, you can expect to pay the highest interest rates if your credit score is below 501.
It is important to note that your APR includes the interest rate and any additional fees charged by the lender. Therefore, it is good to compare APRs rather than solely interest rates between different loan options to see which loan is actually cheaper. Check how much the monthly payment and APR are for every lender and select the lowest APR to be on the better side.
Factors That Affect Car Loan Rates
Consider the following factors when taking an auto loan. Each of these factors plays a different role in determining your car loan APR.
Credit Score
As mentioned above, your credit score is one of the most critical factors in determining your car loan’s annual percentage rate. A higher credit score can lead to a lower APR and a lower credit score results in a higher APR. For example, if you have a credit score of 800, lenders will perceive you as a low-risk borrower and offer you lower interest rates and better loan terms, resulting in lower monthly payments and a lower APR. On the other hand, a poor credit score is seen as high risk and leads to higher interest rates, higher monthly payments, and a higher APR.
Income
Income is a major determining factor when applying for a car loan, especially with bad credit. Most car dealerships and auto lenders catering to bad credit car buyers will look for a debt-to-income ratio when offering loans. Generally, the lower your debt-to-income ratio, the more creditworthy you are, and the higher your chance to qualify for lower interest rates on car loans.
Down Payment
The amount you pay upfront when car financing is another factor that will determine your interest rate, monthly payment, and APR. If you put down a small amount or choose a no-down payment loan, auto lenders may perceive you as a high-risk borrower and offer you a high interest rate, leading to high monthly payments and a high APR. Conversely, making a larger down payment will reduce the loan principal and increase your chances of getting a lower interest rate and APR.
Length of the Loan Term
Loan terms also affect your APR as lenders may charge higher interest rates on loans with longer terms. Lenders find long-term loans riskier because the longer it takes to pay off the loan the more opportunity exists for a borrower to default on payment. An extended repayment period can increase the chances of default due to unforeseen events that could arise over a longer timeframe.
Age and Type of Vehicle
The vehicle type and age can also affect your loan interest rate and APR. For example, the interest rates on used car loans are higher compared to new car interest rates. This is because lenders find a pre-owned vehicle riskier or harder to accurately value compared to a new vehicle.
Lender Policies
Different auto lenders have different criteria for evaluating borrowers and determining loan rates and terms. While they may base their evaluation on similar factors, they usually give different wattages to factors. For example, a traditional bank or credit union might prioritize a borrower’s credit score when determining which interest rate to offer, a BHPH dealership focuses largely on the borrower's income level.
Assessing the above factors will help you get some estimates for your car loan rate and monthly payment and choose the right lender for your case. For instance, if you have a bad credit score, you will likely get better deals from BHPH dealerships.
Tips for Bad Credit Car Buyers
While a poor credit history may lower your chances of getting a loan with lower interest rates and monthly payments, you can still take some strategies to get a good car loan with bad credit. Moreover, you can improve your credit health in the future by consistently paying your auto loan on time.
Consider these tips to lower your monthly payments and APR on bad credit car loan:
Check Your Credit Score
Check your credit score before applying for a car loan to ensure there are no mistakes on the report. Resolve any issues before the loan application. Credit analysis will also help you know what you are getting into.
Improve Your Credit Health
While this might look difficult, you can still take some measures to improve your credit score. Pay all your utilities before applying for an auto loan. Make sure to limit shopping, pay down revolving account balances, and avoid applying for new credit when heading to a car loan application.
Make a Down Payment
Paying some money upfront will help you lower your monthly payment and APR. Making a down payment will likely increase your chances of getting lower interest rates on your car loan. Moreover, paying a portion of your car price upfront means less money borrowed and a lower car loan cost.
Choose a Suitable Car
The vehicle you choose to buy can affect your interest rate, monthly payments, and APR, so choose the right vehicle for your case. Try to go for a car that can meet your commute needs while also being easy on the pocket.
Compare Different Lenders
Apply for different lenders and dealerships to compare interest rates, monthly payments, and APR. Make sure to look at interest rates and any other costs involved in the car financing. Most lenders charge fees for various services during the financing process, so pay head to these add-ons. Shopping around will help you choose the most reliable dealership and favorable car loan with bad credit.
Get a Favorable Car Loan with Bad Credit in Fruitland Park, Florida
Getting an auto loan with a poor or no credit history can be a real struggle. But, we at Honest Autos make car financing for bad credit borrowers a breeze. Our team makes sure to help you find a good Buy Here, Pay Here car loan according to your financial circumstances and needs.
We are determined to help you keep your APR low and be able to manage monthly payments comfortably. Contact us today to find out how we can help you.
