What are Car Loan Interest Rates Based On?

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Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


, Contributing Writer - April 26, 2018

Lenders base auto loan interest rates on many different factors, ranging from a borrower’s credit, to the federal funds rate, to a vehicle’s year and mileage.

How Lenders Decide Auto Loan Interest Rates

Lenders set interest rates based on risk. Since different lenders use different methods to evaluate risk, how a lender weighs certain factors influences the rate a borrower receives. Here are the main factors lenders use when determining the interest rate a borrower qualifies for:

  • Credit Score: A car buyer's credit score is the most important factor in deciding their interest rate. Auto lenders assign borrowers an interest rate based on their credit score and other risk factors, which allows buyers with good credit to qualify for lower rates. Lenders charge borrowers with bad credit higher interest rates based on the added risk.
  • Vehicle Age and Mileage: Generally, lenders offer lower interest rates on loans for new cars compared to used cars. Rates can be even higher for used cars that are older and/or have more more miles to offset the added risk of their lower value.
  • Location: Differing state lending laws lead interest rates to vary based on where a borrower lives.
  • The Federal Rate: The federal funds rate, which is set by the Federal Reserve, is the rate banks and credit unions charge each other to borrow money on reserve, which influences the rates lenders charge to borrowers.

The Bottom Line

Borrowers that need a car loan should be aware of the factors lenders base interest rates on, but know that their credit score is the most important. Car buyers can prepare for their loan by checking their credit score before applying and researching the typical rates borrowers in similar situations qualify for.

If your credit is less than perfect and you're struggling to get approved for an auto loan, CarsDirect offers a unique way to help. We help people get auto loans by matching them to local dealerships that are experienced in handling challenging credit situations. Get this process started by submitting our free and easy auto loan request form online right now.

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, Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


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