Why Is My Car Loan Interest Rate So High?

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Even with poor 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 13, 2020

There are a number of reasons your auto loan interest rate can be high. Typically, it has to do with your credit score and a combination of other factors, such as if you rent or own and the vehicle you're financing. If you purchased a vehicle with bad credit, and you're wondering "why is my car loan interest rate so high?" we're here to answer that question.

Bad Credit Car Loans and APR

When you've got bad credit, it impacts your life in many ways. One of them is that you typically don't qualify for the best interest rates when you're shopping for credit. This doesn't just apply to auto loans either – mortgages, credit cards, and other lines of credit are all bound to cost a little more with a poor credit score.

The main reason you have a higher interest rate with poor credit is because a credit score reflects your risk as a borrower, and it’s the largest deciding factor in the rate you qualify for. Interest rates are the cost of borrowing money, and the lower your credit score, the higher the interest rate is likely to be. It has a lot to do with your credit history, as well.

A poor history of making payments on time leads to a poor credit score, and means a bigger risk for lenders. Interest rates also vary based on the current federal interest rate, as well as the state you live in. However, even if you have to take out a bad credit car loan, in time you may be able to refinance and qualify for a better interest rate.

Used Cars and High Interest Rates

If you finance a used car, no matter your credit score, you're likely to see a higher interest rate than if you were to finance a new vehicle. This is because used cars are harder to value. Many lenders feel it's riskier to finance used vehicles because, statistically, more borrowers default on used car loans. This is another reason for their higher interest rates.

Interest Rates and Auto Loan Terms

Another reason you may be seeing a higher interest rate may be your loan term. Generally speaking, the longer the auto loan, the higher the interest rate. Your APR is usually higher still if you have poor credit and are looking for a lengthy loan term to reduce your monthly payment.

A longer loan may seem like a good idea when you're looking at a smaller monthly payment, but you're going to end up paying more than you bargained for in the long run, especially if that loan has a high interest rate.

Down Payments Can Impact Interest Rates

Finally, if you opted for the minimum down payment, or are given the option to not make a down payment, you may have a higher interest rate on your loan.

A down payment is one of the best things you can do for yourself as a bad credit borrower. In rare cases, a down payment may help you land a lower interest rate, but the real benefits is that putting money down means you're paying less overall due to lower interest charges over the term of your loan.

A down payment can also help you to combat negative equity. The more you can put down, the better off you're going to be when it comes to gaining equity in your vehicle.

Combating a High APR on Your Auto Loan

With a combination of these factors likely affecting your interest rate, you may think that you're doomed when it comes to buying a car. But that's not the case. If you want the best chance at a decent interest rate when financing a vehicle as a bad credit borrower, you can use these tips to help:

  • Know your credit score and what's on your credit reports. Knowing your score before heading to the dealer can help you research the average interest rate you might qualify for, which can help you budget accordingly.
  • Choose the shortest loan term you can comfortably afford. Remember, the longer the loan term, the more you're going to pay overall.
  • Make the biggest down payment you can. A down payment helps you take out a smaller loan, and may open more opportunities for better loan terms, and possibly even give you a better selection of cars to choose from at a dealership.
  • Opt for a certified pre-owned vehicle if you have to buy used. These cars are typically only a few years old and come with a manufacturer-backed warranty. Plus, newer vehicles tend to have lower interest rates.
  • Get a cosigner. If credit is keeping your interest rate higher than you'd like, adding a cosigner with good credit could be your ticket to qualifying for a better APR.

Ready to Find Your Next Car?

With the question of why your auto loan interest rate is so high answered, and tips on how to get the best APR, you're ready to get moving on your next car loan. But where to start? Right here, of course!

At CarsDirect, you can shop new and used vehicles, find all the auto loan and bad credit car buying advice you need, and get matched to a local dealer to get the process started! We work with a nationwide network of special finance dealerships that are teamed up with lenders that know how to help people in unique credit situations. Fill out our fast, free, and zero-obligation auto loan request form to get started right now.

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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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