Understanding APR and Monthly Payments in Bad Credit Auto Loans

Posted Friday, Jun 28, 2024

The Annual Percentage Rate (APR) reflects the costs connected to your loan and the annual payment required for interest and other fees when buying a car, and it is mainly based on your credit score.

Your credit score informs lenders about your capability to repay your debt; typically, individuals with high credit scores receive a lower APR, while those with low credit scores face higher APR rates. This is due to lenders sensing individuals with poor credit as more risky or prone to defaulting on their loans compared to those with outstanding credit scores.

Additionally, extra charges imposed by your lender or car dealership could considerably raise your APR. Including these fees in your car loan will result in even higher costs over time.

Having a poor credit score makes it necessary to secure a favorable APR, as it can severely impact the overall affordability of the loan.

How APR and Monthly Payments Affects Bad Credit Auto Loans?

Low APR loans for bad credit and monthly payments have a significant impact on auto loans, making them even more expensive than loans for borrowers with good credit.

Individuals with poor credit ratings usually qualify for loans with higher APRs, leading to a substantial increase in the overall interest paid on the loan. For instance, if you borrow $10,000 for a vehicle with a 5% APR, you would pay around $500 in interest annually. Conversely, a 15% APR would result in an annual interest cost of $1,500, representing a significant disparity.

Your monthly loan payment is also directly impacted by the Annual Percentage Rate; as auto loans for people with poor credit have higher interest rates, the monthly payment will be higher than for a loan with a lower APR.

Let's consider an example to understand the impact of APR and monthly payments on bad credit auto loans. Suppose the loan amount is $15,000, with a loan term of 5 years (60 months). For borrowers with good credit, they might qualify for an APR of 7%, resulting in an approximate monthly payment of $315. Over the loan term, they would pay approximately $4,500 in interest.

However, for individuals with bad credit, their loan terms could come with a higher APR, let's say 14%. This higher APR leads to a higher monthly payment, approximately $385 in this case. Over the loan term, they would end up paying approximately $10,500 in interest, more than double the interest paid by those with good credit.

As you can see, even with a slightly higher loan amount, bad credit results in a significantly higher monthly payment and doubles the interest paid.

Factors Influencing APR For Bad Credit

Not sure about the factors that impact the APR you'll be offered? These are some of the factors that lenders consider when deciding whether to approve your loan and how much it will cost.

Credit Score

One of the main factors that affects your auto loan interest rate is your credit score. If you have a higher credit score, lenders view you as a more desirable borrower, and as a result, you are more likely to be offered a lower APR.

Before you start looking for a car to buy, it's a good idea to check your credit score to understand your current standing. Generally, your credit history impacts your credit score; paying your bills on time, keeping your outstanding balance significantly lower than your credit limits, having long-standing credit accounts, and having a diverse range of credit accounts can have a positive impact on your score.

Down Payment Amount

Another factor that can affect your APR is whether you're willing to make a down payment on the car. When you contribute a larger sum upfront, lenders may offer you a favorable interest rate. Making a down payment is an indicator to lenders that you are committed to making timely loan repayments. It shows that you have invested your own money in the car and are less likely to default on the loan, as you wouldn't want to lose the vehicle and the money you have already paid for it.

The Length of Your Loan Term

If you choose a longer loan term, your monthly payments may be lower. However, lower monthly payments might seem appealing, but you need to estimate whether it's the right choice for you. With a longer loan term, you'll be making payments over an extended period, but during that time, the value of the car may depreciate. This means there's a risk of owing more on the car than its actual worth. Additionally, a longer loan term could extend beyond your car's warranty period, which might result in having to pay for repairs while still making your monthly car payment.

The Type of Vehicle

When you purchase a new car, it's important to consider that its value can decrease by around 10% to 20% as soon as you drive it. This might make you reconsider whether buying a new or used car is a better option. However, it's worth noting that the APR on a new car loan is usually lower compared to a used car. Lenders consider used cars risky since they are more prone to breakdowns. Additionally, a gently used car typically has a lower APR compared to a much older vehicle.

Lender Type

Different lenders have different risk tolerance and target markets. Banks and credit unions generally offer lower APRs but may have strict credit score requirements. On the other hand, dealerships offer loans to those who have bad or non-existent credit, but those loans will likely have higher APRs.

Risks of High APR for Car Loan with Bad Credit

The APR of your car loan significantly affects the total amount you will pay for borrowing the money throughout the loan's duration. It is wise to choose a loan with a low APR for better financial outcomes. To find the best rate, it's best to compare multiple loans before signing a loan agreement.

Also, consider choosing a short-term loan as it can help you save more money and get a lower APR, because lenders offer lower rates for shorter-term loans since borrowers will take less time to repay the loan. Although longer loans may offer lower monthly payments, they end up costing more in the long run.

Here's an example: suppose you have a five-year loan of $28,800. If the loan has a 4.96 percent APR, the total interest added up over the loan's duration would amount to $1,424. However, if the same loan amount and term have an 11.93 percent APR, the total interest would increase to $3,582.

For borrowers with poor credit, having the same loan amount and term but with an APR of 23.81 percent would result in $7,561 in interest over the life of the loan. This highlights that a low APR can make a significant difference, potentially helping you save over $6,000 throughout the term of a car loan.


At Honest Autos, we understand the importance of securing a competitive APR for individuals with bad credit who are looking to finance their car. Our dealership offers solutions tailored to the needs of such individuals, offering pathways to lower monthly payments and improved financial well-being.

We assist our customers in understanding APR, exploring refinancing options, improving their financial literacy, and providing affordable car financing options to our valued customers.