Average car loan interest rates: Calculate your car payment
Car loans are a popular way for people to finance their vehicle purchases. However, many don’t fully understand the impact of the interest rates that come with them. Knowing the average car loan interest rate can help you budget and determine what kind of monthly payment you can afford. This article will outline the average car loan interest rates by credit score, explain the factors that affect them, and show you how to calculate your monthly car payment.
Average car loan interest rates by credit score
Your credit score is one of the most significant factors that affect the interest rate you’ll be offered on a car loan. Lenders use your credit score as a way to assess your creditworthiness. It helps a lender determine the risk they’re taking on by lending you money. Here are the average interest rates for different credit scores:
- Excellent credit (720 and above): 3% – 4%.
- Good credit (680-719): 4% – 5%.
- Fair credit (620-679): 7% – 8%.
- Poor credit (619 and below): 10% or higher.
Factors that affect car loan interest rates
Several factors can impact the interest rate a lender might offer you for a car loan. The key ones are:
- Credit score.
- Loan term.
- Loan amount.
- Type of car.
- Income level.
- Employment status.
- Debt-to-income ratio.
Here is a look at each of these factors and how they impact your potential auto loan’s interest rates.
Credit score
Your credit score is one of the most significant factors affecting your car loan interest rate. Generally, the higher your credit score, the lower your interest rate. Lenders consider your credit score to measure your ability to repay the loan. You’ll likely be offered the best interest rates available if you have an excellent credit score (720 and above).
On the other hand, if you have poor credit (619 and below), the lender will most likely offer higher interest rates. There’s also the risk that you may not be approved for the loan at all. Keep in mind that lenders may have different definitions of what constitutes excellent or poor credit. It’s best you check with your lender for their specific guidelines.
Loan term
The length of your loan can also impact your interest rate. Shorter loan terms, such as 36 or 48 months, often come with lower interest rates when compared to longer loan terms, such as 60 or 72 months. That is because a shorter loan term means you’ll pay off the loan sooner. That translates to a lower risk for the lender. Longer loan terms may have higher interest rates because they carry more risk. Lenders recognize there’s a greater chance of something happening to the car or your financial situation changing during a longer loan term.
Loan amount
The amount you intend to borrow can also impact your interest rate. Generally, larger loans come with higher interest rates. That is because lenders are taking on more risk with larger loans, so they want to ensure they can secure a profit on the loan. It’s important to note that borrowing more than you can afford can also have negative consequences. That holds true even if you can secure a lower interest rate. Be very cautious about applying for a loan in hopes you’ll make more money during the loan term.
Type of car
The type of car you’re financing can also impact your interest rate. Newer cars often have lower interest rates than used cars or older models. That is because lenders view newer cars as less risky since they’re typically more reliable and come with a warranty. Rates for a used car loan might have higher interest rates. Older models typically have worse interest rates because the vehicles aren’t worth as much and are considered a higher risk due to the potential for breakdowns or repairs.
Income
Your income level is another important factor in determining whether you’ll be approved for a car loan and what interest rate the lender will offer. Lenders typically prefer borrowers with a stable income, which indicates a greater likelihood that the borrower will be able to make their payments on time. Higher-income earners may also be offered lower interest rates. Lenders aren’t willing to loan you money for an expensive luxury car if you don’t have the income to make the payments.
Employment status
Your employment status also impacts a lender’s decision on whether to approve your loan and what interest rate to offer you. Borrowers with a stable job and steady income are generally considered lower-risk and may be offered lower interest rates. Self-employed individuals may have a more challenging time getting approved for a loan or may be offered higher interest rates.
Debt-to-income ratio
Your debt-to-income ratio measures how much of your income goes toward paying off debts each month. Lenders look at this ratio to determine how much of a risk you are as a borrower. Generally, borrowers with a lower debt-to-income ratio are considered lower risk and may be offered lower interest rates. Lenders may also consider other debt-related factors, such as your credit utilization ratio (the amount of available credit you’re using) and your payment history on other loans and credit cards.
It’s important to remember that the specific factors that lenders consider can vary depending on the lender and the auto loan rates you’re applying for. Some lenders may place more emphasis on your credit score, while others may look more closely at your income and employment status. To increase your chances of being approved for a loan with a lower interest rate, it’s a good idea to work on improving all of these factors, including your credit score, income, and debt-to-income ratio.
How to calculate monthly car payments
You’ll need to use the car loan formula to calculate your monthly car payment. The formula is:
M = P * (r(1 + r)^n) / ((1 + r)^n – 1)
Where:
- M is the monthly payment.
- P is the loan amount.
- r is the monthly interest rate (calculated as the annual interest rate divided by 12).
- n is the number of payments.
Read on to see several examples of how to use the formula to calculate your monthly car payment.
Example 1
Let’s say you want to borrow $20,000 for 60 months at an annual interest rate of 6%. The monthly interest rate is (6/12) = 0.5% or 0.005.
Plugging these values into the formula: M = $20,000 * (0.005(1 + 0.005)^60) / ((1 + 0.005)^60 – 1) = $377.42
Your monthly payment would be $377.42.
Example 2
Let’s say you want to borrow $15,000 for 36 months at an annual interest rate of 5.5%. The monthly interest rate is (5.5/12) = 0.4583% or 0.004583.
Plugging these values into the formula: M = $15,000 * (0.004583(1 + 0.004583)^36) / ((1 + 0.004583)^36 – 1) = $449.76
Your monthly payment would be $449.76.
Example 3
Let’s say you want to borrow $25,000 for 48 months at an annual interest rate of 6%. The monthly interest rate is (6/12) = 0.5% or 0.005.
Plugging these values into the formula: M = $25,000 * (0.005(1 + 0.005)^48) / ((1 + 0.005)^48 – 1) = $582.02
Your monthly payment would be $582.02.
Example 4
Let’s say you want to borrow $10,000 for 60 months at an annual interest rate of 7.5%. The monthly interest rate is (7.5/12) = 0.625% or 0.00625.
Plugging these values into the formula: M = $10,000 * (0.00625(1 + 0.00625)^60) / ((1 + 0.00625)^60 – 1) = $201.03
Your monthly payment would be $201.03.
Finally, let’s look at someone with a poor credit score who is offered a significantly higher interest rate.
Example 5
Someone with a poor credit score is offered a 72-month car loan for $15,000 with an interest rate of 12%. The monthly interest rate is (12/12) = 1% or 0.01.
Plugging in these values, we get: M = $15,000 * (0.01(1 + 0.01)^72) / ((1 + 0.01)^72 – 1) = $288.43
The monthly payment for this loan would be $288.43.
This example might seem reasonable but look at the length of the loan term. You would be paying a significant amount of interest with these terms. Remember that these are just made-up examples. Actual rates and loan terms may vary based on the lender, the borrower’s credit score and financial situation, and other factors.
Also, borrowers must factor in additional costs when working on a budget for a new car. A few of the most overlooked ones are sales tax, insurance, and maintenance. Insurance premiums vary on vehicles. Your dream car might quickly become a nightmare if you don’t research insurance premiums and maintenance costs.
Tips to lower your car loan interest rate
Discount Percent And Interest Percentage Sign On Invoice
If you’re looking to reduce the cost of your car loan, there are several ways to lower your interest rate. Here are the top tips to keep in mind:
Improve your credit score
Your credit score is one of the most significant factors in determining your car loan interest rate. You’re more likely to get a lower interest rate if you have a higher credit score. To improve your credit score, make sure you pay your bills on time, reduce debt, and check your credit report for errors. By doing so, you can qualify for a better interest rate and save thousands of dollars over the life of your loan.
Shop around for the best loan
Another way to lower your car loan interest rate is to shop around and compare rates from different lenders. Banks, credit unions, and online lenders have different rates and terms, so it’s crucial to research and find the best deal. Use a loan comparison tool to help you compare offers from various lenders and choose the one that’s right for you.
Negotiate with the lender
If you’ve found a lender you like, but the interest rate is higher than you’d like, try negotiating with the lender. Some lenders are willing to work with borrowers to lower the interest rate, especially if you have a strong credit score and a stable income. You can use your research on other offers as leverage in the negotiation.
Make a larger down payment
Finally, making a larger down payment can also lower your car loan interest rate. By putting more money down upfront, you reduce the amount you need to borrow, which can lower your interest rate and monthly payment. That can be a good strategy if you have some savings and want to minimize the cost of financing your vehicle.
Refinancing
If you’ve already taken out a car loan with a higher interest rate, you can try to refinance the loan with a lower interest rate. That can save you money in the long run, especially if you find a significantly lower interest rate.
Choose a shorter loan term
As mentioned earlier, the length of your loan can affect your interest rate. Choosing a shorter loan term can help you secure a lower interest rate.
Buy a cheaper car
Car prices can also impact your interest rate. If you opt for a less expensive car, you might be able to secure a lower interest rate on your loan.
Consider a secured loan
If you have a valuable asset, such as a house or a savings account, you might be able to secure a loan with that asset as collateral. Secured loans often come with lower interest rates than unsecured loans.
Improve your debt-to-income ratio
Lenders consider your debt-to-income ratio when determining your interest rate. If you have a high level of debt relative to your income, you may be seen as a higher-risk borrower and be offered a higher interest rate. Paying down your debt and increasing your income can help improve your debt-to-income ratio and help you secure a lower interest rate.
It’s important to note that not all of these factors may be applicable or feasible for everyone. However, by being aware of the different factors that affect your car loan interest rate, you can make more informed decisions regarding securing a loan that can potentially save you money in the long run.
Final thoughts on car loan interest rates
To summarize, multiple factors affect car loan interest rates, including your credit score, loan term, loan amount, and type of car. Understanding these factors can help you make an informed decision about financing a vehicle. Other costs, such as taxes, insurance, and maintenance, should also be considered when calculating your monthly car payment. To lower your interest rate, you can improve your credit score, shop around for the best loan, negotiate with the lender, and make a larger down payment.
When considering a car loan, carefully review all the terms and conditions to ensure you’re getting the best deal possible. Don’t rush into a loan. Take your time and research all your options. Take the time to shop around and compare rates from different lenders. Remember that a lower interest rate can save you thousands of dollars over the life of the loan, so it’s worth the effort to find the best deal. Finally, always make sure you can afford the monthly payments before signing on the dotted line. By following these tips and being diligent in your research, you can find the best car loan for your needs and budget.
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