When it comes to buying a new or used car, most people choose to finance the purchase through a loan rather than paying the entire amount upfront. However, getting a loan means paying it back with interest, and finding the best car loan rate can be a bit tricky. The average interest rate on a car loan varies depending on factors such as the buyer’s credit score and whether they are looking for a loan for a new or used car.
According to Experian, in the third quarter of 2023, the average interest rate for buyers with the highest credit scores who are purchasing a new vehicle is 5.61%. On the other hand, buyers in the lowest credit score tier looking to buy a used vehicle face an average interest rate of 21.18%. These rates are subject to change and are influenced by various factors.
Determining what constitutes a good car loan rate can be challenging because it is constantly changing. Car loan rates are primarily dependent on the buyer’s credit score. Different lenders have their own criteria for determining interest rates. In general, buyers can expect their interest rates to fall somewhere between the best and worst rates mentioned earlier.
Your credit score plays a crucial role in calculating the interest rate on a car loan. The higher your credit score, the lower your interest rate will be. For example, people with very good credit may enjoy interest rates as low as 3 percent, while borrowers with bad credit could face rates in the 10-to-15-percent range. Monitoring your credit score is essential, and there are several websites like Credit Karma, Equifax, and Experian that allow you to do so.
In addition to credit score, other factors can affect your interest rate. The length of the loan term is one such factor – shorter loan terms generally result in lower interest rates. Used cars tend to have higher interest rates compared to newer cars because some of their value has already depreciated. Furthermore, making a larger down payment upfront can lead to a lower interest rate and monthly payment.
Understanding how interest rates affect monthly payments is crucial. To illustrate, let’s consider a scenario where you’re buying a $30,000 vehicle and putting down $5,000 on a 60-month loan. With a good interest rate of 4 percent, you would pay a total of $2,624.78 in interest over the loan term, resulting in a monthly payment of $460.41. However, with a higher interest rate of 12 percent due to a lower credit score, you would end up paying $8,366.67 in interest, increasing your monthly payment to $556.11.
To secure the best car loan rate, there are a few tips to consider. First, opting for a shorter-term loan means fewer monthly payments and less overall interest. Although the monthly payment may be higher, it can save you money in the long run. Additionally, paying off your loan early by making higher monthly payments reduces the total amount of interest paid. Making a larger down payment upfront also leads to lower interest rates and monthly payments. Lastly, getting preapproved for a loan gives you an idea of what interest rate you can expect based on your credit score and other factors.
When it comes to getting a car loan, many options are available. Your local bank or credit union is often able to assist with financing. Additionally, new car dealerships often offer financing options through the automakers themselves. Some commonly used places to secure car loans include PenFed Credit Union, Consumers Credit Union, Bank of America, Capital One, Carvana, and LightStream.
In conclusion, securing the best car loan rate requires considering various factors such as credit score, loan term, and down payment. Monitoring your credit score and exploring different lenders can help you find the most favorable interest rate. By being proactive and informed, you can make a well-informed decision and get the best car loan rate for your needs.