The average interest rate for a car loan is higher if you have bad credit than if you have a good credit score. This is because lenders charge higher interest rates to borrowers with poor credit. Before financing a vehicle, you should look up the average interest rates you can expect based on your credit score. This way, you can avoid any surprises and know what to expect going in, so you're more prepared to successfully complete your loan.
Average Interest Rates for Car Loans with Bad Credit
Experian, one of the country's three main credit bureaus, issues quarterly reports that study data surrounding the auto loan market. Their State of the Automotive Finance Market Report from the first quarter of 2022 found that the average interest rates for both new and used auto loans look like this:
| Credit Tier (Credit Score) | Average New Car Loan Interest Rate | Average Used Car Loan Interest Rate |
| Super prime (781-850) | 2.40% | 3.71% |
| Prime (661-780) | 3.56% | 5.58% |
| Nonprime (601-660) | 6.70% | 10.48% |
| Subprime (501-600) | 10.87% | 17.29% |
| Deep subprime (300-500) | 14.76% | 20.99% |
As you can see, your credit score has a major influence on the interest rate you can qualify for. Auto lenders base interest rates on several factors, including the length of the loan, the vehicle's age and mileage, and the state you live in – but your credit score is by far the most important factor.
Your interest rate ultimately determines your monthly payment and the total cost of financing. So, unfortunately, a bad credit score means you end up paying more in the long run.
The Cost of Bad Credit
Let's look at how higher interest rates affect a car loan, using an example. Let's say you're buying a used car, and the loan is for $14,000 with a term of 60 months (five years). Check out how different auto loan interest rates influence the monthly payment and overall cost of the car:
| Monthly Payment | Interest Paid | Total Cost | |
| 3.71% Interest Rate | $256 | $1,360 | $15,360 |
| 5.58% Interest Rate | $268 | $2,076 | $16,076 |
| 10.48% Interest Rate | $301 | $4,047 | $18,049 |
| 17.29% Interest Rate | $350 | $7,007 | $21,007 |
| 20.99% Interest Rate | $379 | $8,720 | $22,720 |
Using the average used car loan interest rates from the first table, you can see that as credit scores drop and the interest rate increases, the total cost of financing goes up dramatically.
Tips for Car Buyers with Bad Credit Scores
There’s no getting around the fact that if you have less than perfect credit and need an auto loan, the cost of financing is going to be higher. Despite this drawback, you can use your car loan to help improve your credit score for the future – all you have to do is make your payments on time each month.
Here are some tips you can use to help you save money on your bad credit auto loan:
- Know your credit score beforehand – You can give yourself an advantage by checking your credit score before applying for a car loan. Get your score and research average rates people in your range qualify for. This way, nobody can define your creditworthiness for you and you can know what to expect heading in.
- Improve your credit score before applying – If you have the time, it pays to do what you can to improve your credit score before you apply. Any boost you can give your credit rating can help you qualify for a lower interest rate, which helps you save money in the long run. You should pay all of your bills on time to establish a strong payment history, pay down credit card balances and keep them low, and avoid applying for new credit leading up to your car loan.
- Choose an affordable vehicle – Bigger loans cost people with bad credit scores significantly more due to increased interest charges. You can offset this by picking a car that you can comfortably afford. Think basic and reliable at this point in time. Get a car you can count on while using the loan to improve your credit score.
- Choose the shortest term possible – Extending the term of your car loan leads to increased interest charges, which is a poor idea if you have bad credit. Instead, pick the shortest loan term possible to limit the finance charges you pay. Remember to keep the total cost of financing in mind, and make sure the monthly payment still fits within your budget.
- Make a down payment – A down payment reduces the size of your loan, meaning you pay fewer interest charges and save money in the long run with a larger down payment. If your credit score is low, you can expect a down payment requirement, so you might as well get a head start and save for one.
These tips can give you an advantage if you need a bad credit auto loan, where your average interest rate typically reaches double digits if your credit score falls around 600 or below. If you apply these tips and use the loan to improve your credit score, you can put yourself in a much better situation the next time you need to finance a vehicle.