What Is Considered an Unfair Interest Rate on a Car Loan?

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Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - June 30, 2021

If your credit score is poor, you may be concerned about unfair interest rates. One of the better ways to negotiate an interest rate or avoid rates that are too high is knowing what rates other borrowers are getting for scores similar to yours, understanding how usury laws work, and how to rate shop.

What Is Considered an Unfair Interest Rate?

Interest charges are the cost of vehicle financing. Your credit score is typically the main determinant of what rates you can get for an auto loan. If your credit score is poor, then you can expect to qualify for a higher interest rate than a good credit borrower – but that doesn’t mean you have to settle for an unfair rate!

There’s no exact way to estimate what interest rate you qualify for unless you apply with a lender and see what they can offer you. Lenders vary greatly in what rates they can assign, but at the very least, knowing what other borrowers are qualifying for in your credit score range can give you an edge in haggling.

Here are the average interest rates by credit score and vehicle type as reported by Experian in their State of the Automotive Finance Market report in the second quarter of 2021:

Credit Score Average New Car Interest Rate Average Used Car Interest Rate
Super prime (781-850) 2.34% 3.66%
Prime (661-780) 3.48% 5.49%
Nonprime (601-660) 6.61% 10.49%
Subprime (501-600) 11.03% 17.11%
Deep subprime (300-500) 14.59% 20.58%

Using these averages, you can see what a fair interest rate may be for you depending on your credit score and the type of vehicle you finance. If you have great credit in the 700-range, then a lender offering you a 15% interest rate could be considered unfair, and you likely have room for negotiation.

However, if your credit score is below 660 and looking to finance a used car, you may have to plan on an interest rate from 10% to 20% – but this also depends on what’s on your credit reports and the lender you’re working with.

Usury Laws and Auto Loan Interest Rates

There are laws that can limit how high an interest rate can be, called usury laws. They’re there to protect consumers from excessive interest charges and unfair lending practices. That being said, you could receive an interest rate anywhere between 0% to 20% or more – depending on what state you live in, your lender, the vehicle you finance, and your credit score.

There are no federal regulations on how high your interest rate on a car loan can be. Usury laws vary by state.

For example: in Alabama, the maximum interest rate is defined as 8%. However, if the loan amount is higher than $2,000, then the lender can charge more. In Michigan, interest rate laws restrict lenders from charging more than 5%, or 7% with a written agreement. But consumers can waive these limits themselves when agreeing to the terms of the loan, according to FindLaw.com.

Things get even more complicated when you consider that there are different laws depending on the type of loan you get: educational, personal, auto loan, etc. Licensed lending institutions are also generally exempt from usury laws, meaning a bank could charge you whatever they feel like you qualify for based on their own requirements.

Rate Shopping for a Car Loan

If you want to find a fair deal on a car loan, then we recommended rate shopping with multiple lenders.

Rate shopping involves applying for the same type of credit a few different times with different lenders, usually within two weeks. If you apply for a car loan with a few auto lenders within 14 days, then only one hard inquiry should impact your credit score (all show up on credit reports, though). The credit scoring models know that when you apply for new credit of the same type, you’re looking to take on a loan – and if you do it within a short period of time, then it knows you’re most likely comparing lenders and loan terms and it doesn’t punish you for shopping.

If you plan out which lenders you’d like to apply with, you can compare interest rates, loan terms, and maximum loan amounts to choose the loan that you’d prefer for your situation. Having multiple loan offers can also give you the ability to negotiate with lenders. Doing all this in a short amount of time can minimize the impact of multiple credit pulls. One hard inquiry can harm your credit score by around five to 20 points, depending on your current credit score. The damage typically lasts up to 12 months as well, so timing when you apply for an auto loan benefits you long-term.

Finding a Special Finance Dealership

If your credit score isn’t so stellar, then finding an auto lender that can work with poor credit may be difficult. Traditional auto lenders such as banks, credit unions, and online lending institutions may be less willing to work with you if your credit score is low or your credit history is tarnished. However, special finance dealerships are signed up with subprime lenders and often work with borrowers in tough credit circumstances, so this could be a good place for you to start looking for a car loan.

Finding an auto lender that can assist with bad credit can start with us at CarsDirect. Over the last two decades, we’ve cultivated a nationwide network of special finance dealerships signed up with subprime lenders, and we want to look for one in your local area.

Get started by completing our free auto loan request form. It’s quick, free, and carries no obligation.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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