What Determines Your Car Loan Interest Rate?

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Even with poor credit.

By

Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - February 20, 2019

Your interest rate isn’t determined just by your credit score. There are three other big factors that determine what interest rate you qualify for: the vehicle, where you live, and the federal funds rate.

How Your Interest Rate is Determined

Unless you have great credit, the likelihood of qualifying for a zero percent APR program is slim to none. Your credit score is the first thing lenders look at to determine your risk level. The lower your credit score, the higher your interest rate is generally going to be. But just what interest rate you qualify for is based on factors outside of your credit score, too:

  • Your car – Auto loans for new vehicles typically come with a lower interest rate than used cars. Depending on how old the used vehicle is and how many miles are on it, a lender can hike up the interest rate to offset the greater risk of buying a used car.
  • State you live in – Each state has laws about the maximum interest rate lenders can charge.
  • Federal rate – The federal funds rate influences the rates lenders charge to consumers. This is set by the Federal Reserve, and can fluctuate each quarter.

How to Qualify for a Lower Interest Rate

Potential car buyers with poor credit typically see an average interest rate of between 16 and 20 percent. That’s a lot of interest to pay on an auto loan, and it can make a cheap vehicle no longer feel affordable. But you can qualify for a lower interest rate, and the key is to watch your credit.

Because your credit is the biggest factor in determining the APR you qualify for, you should take steps toward building a better credit score. This includes making payments on time and in full each month, adding lines of credit cautiously, and paying off any substantial debt.

It takes time to build up from a bad credit score to a good one, and if you need a car now, you may not be able to get a great interest rate. If this is the case, you should still take on a bad credit auto loan and look for the best interest rate you qualify for. After a year or two of implementing good credit practices, you should be able to refinance the car loan for a better interest rate.

Need Help Finding a Dealer to Work With?

You may not get your ideal interest rate if your credit isn’t the best, but you can improve your credit over time and either refinance your current loan or start your car buying journey then.

It’s not easy finding the financing you need when your credit’s struggling. CarsDirect wants to help you find a local dealership that has the lending resources to fit your needs. Our service is free of cost and comes with no obligations. To get started, simply fill out our auto loan request form, and we’ll get right to work matching you with a dealer near you!

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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