Let’s look at the different auto loan rates above and see how they impact your bottom line. We’ll use a loan term of five years and a new-car loan amount of $28,800 (which is the amount left to finance after a 20% down payment on the average price of a new car at $36,000). Using the average interest rate for people with top-notch credit, 5.32%, that works out to $2,257 in interest payments. People with good credit and an interest rate of 6.02% will pay a bit more, with interest on the loan amounting to $4,495. When the rate goes up to 11.4% for people with fair credit, total interest payments also go up, hitting $8,863. At 16.46%, the average new-car interest rate we found for people with poor credit, the total interest comes to $13,266. That’s more than a third of the car’s purchase price of $36,000 and about $9,500 in added costs compared to what someone with excellent credit would pay.To get more
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Use our car loan calculator to find out how much you'd pay for a loan. Let’s do the same thing for a loan on a used car. We’ll use a loan amount of $16,000. Borrowers with top-tier credit and an average interest rate of 4.90% would pay just $2,072 in interest over the life of a five-year loan. Interest costs hit $2,680 for borrowers with good credit an an interest rate of 6.27%. At 11.65%, the rate for buyers with fair credit, total interest costs hit $5,185 over five years. Buyers with poor credit get an interest rate of 16.71%, and pay $7,709 in interest, which is almost half of the original loan amount, and about $5,500 more than what someone with excellent credit would pay in interest. Car loan rates are driven by two main factors: borrowing interest rates set by the Federal Reserve and your credit score.
When the federal reserve keeps interest rates low, borrowing money to buy a car tends to be less expensive. After rates set by the Federal Reserve, your credit score has the most impact on the car loan interest rate you’ll pay. If you have a good credit score, you’ll qualify for a lower interest rate. When you finance a car, you borrow the amount of money you need to buy the car, and the lender charges you interest. The interest is basically rent on the money you borrow. It allows the lender to make a profit and get more of their money back if you default on a loan. You can read more about how financing a car works and check out our guide to car loans and leasing for more details.
Lenders perceive people with low credit scores as less likely to pay back the money they borrow. Factors that can contribute to a low credit score include things like being late on loan payments and other bills, having a high level of debt, or failing to repay loans. All of these factors indicate that a borrower has trouble managing money. Other factors that impact your auto loan rate are the type and length of the loan. Used-car loans have a higher interest rate than new-car loans because used cars have a lower resale value than new cars. If you default on a used car loan, the lending company will be left with a lower-value asset to sell. They charge more interest to protect themselves and recoup more of their money in case the loan goes into default. The length of the loan you’re looking for also affects your interest rate. A longer loan term means lower monthly payments, but it also means that you’ll be taking longer to pay the lender back. A higher interest rate helps them get more of their money back upfront, in the event you default on the loan.