Why Are Car Loan Interest Rates Higher with Bad Credit?

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - May 15, 2019

Interest is the fee you pay for borrowing money from a bank, credit union, or other lender. Higher interest rates reduce the risk of extending a loan to someone who may not have the best track record when it comes to credit history. From a lender standpoint, the lower the credit score of a borrower, the higher the risk typically is.

What Impacts Interest Rates?

Interest rates are expressed as a percentage and based on the federal funds rate – the baseline for all rates – and your credit score. Other factors can also impact auto loan interest rates, such as vehicle age and where you live.

The federal funds rate, which is set by the Federal Reserve, is the rate that banks charge each other to borrow money, and influences all other lending rates in the nation. If the federal funds rate goes up, all interest rates generally go up, and vice versa.

Different credit scores earn you different interest rates – the lower the annual percentage rate, or APR, the better. If you have a low credit score, it tells lenders that you haven't handled credit well in the past, and could signal that you may not handle a new loan well. To offset the risk this represents, people with bad credit are charged higher interest rates.

Interest rates are also impacted by the car you're buying. Typically, newer vehicles come with lower interest rates compared to used cars. Used vehicles may get even higher interest rates as they age and accumulate miles.

Lastly, the state you live in can influence the interest rate you get because different states have different lending laws that make rates vary.

Average Interest Rates for Bad Credit

According to Experian – one of the three national credit bureaus – in their quarterly State of the Automotive Finance Market report, as of the fourth quarter of 2018, interest rates in general have risen slightly from 2017. However, subprime and deep subprime rates for used cars have dropped slightly overall:

Credit Score Average New Car Loan Interest Rate Average Used Car Loan Interest Rate
781-850 (Super Prime) 4.19% 4.69%
661-780 (Prime) 5.01% 6.38%
601-660 (Nonprime) 7.91% 10.91%
501-600 (Subprime) 12.17% 16.78%
300-500 (Deep Subprime) 14.88% 19.62%

The interest rate impacts the overall cost of your loan, so it's important to research the typical APR your credit score might qualify you for. This way, you know when a lender is offering you a good rate on your loan.

Sometimes, you're able to rate shop – apply with different lenders for the same loan. Rate shopping means any inquiry that you initiate for the same type of credit within a 14-day window is counted as one hard inquiry. This impacts your credit score less than spreading out loan applications over the course of several months.

The Bottom Line

Even though there are several factors that impact your interest rate, you can see how your credit score is the biggest influencer. In order to get the best interest rate you possibly can when you're applying for an auto loan, make sure you know where your credit stands, and make sure you're working with the right lender.

With bad credit, this means working with a subprime lender that knows how to handle bad credit car loans. Even though they look at your credit, they base approvals on other factors such as income, employment, and residence. These lenders work indirectly through special finance dealerships, but it's not always easy to tell which dealers have these resources.

This is where CarsDirect comes in. We work with a nationwide network of special finance dealerships that have the lenders you need for your next auto loan. Getting started is simple. Just fill out our easy, no-obligation car loan request form and we'll get the process of connecting you to a local dealer started.

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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