If you’re looking to finance a new car, you’re probably wondering what a good interest rate is. Here’s what you need to know.
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Car Loan Interest Rates
The average car loan interest rate is 4.21% for new cars and 5.09% for used cars. lenders typically charge higher interest rates for used cars than for new cars. Factors that can affect your interest rate include your credit score, the length of your loan, and the prime rate. In this article, we’ll dive deeper into how these factors affect your interest rate so that you can get the best rate possible on your car loan.
New Car Loan Interest Rates
The average interest rate for a new-car loan has been hovering around 4% for the past few months, according to Bankrate’s weekly national survey.
But that’s just an average. Depending on your credit score, the type of car you’re buying and the length of the loan, your interest rate could be much higher or lower than 4%.
Interest rates on new cars are closely related to the Fed’s target rate for federal funds, which is currently 2%. The federal funds rate is the rate at which banks lend money to each other overnight. When the Fed raises or lowers this rate, it affects all other interest rates, including auto loan rates.
But there are other factors that affect new-car loan interest rates besides the Fed’s target rate. Lenders also consider your credit score, and the type of car you’re buying can affect your interest rate as well. For example, lenders typically charge a higher interest rate for luxury vehicles than they do for economy cars.
And finally, the length of your loan also plays a role in determining your interest rate. Shorter loans usually have lower interest rates than longer loans because they involve less risk for lenders.
If you have good credit, you should be able to get a new-car loan with an interest rate of around 4%. But if you have bad credit, your interest rate could be 10% or even higher.
The best way to get a low interest rate on a new-car loan is to shop around and compare rates from multiple lenders before you choose one.
Used Car Loan Interest Rates
The average interest rate for a used car loan is around 5.3%. This rate can vary depending on your credit score, the age and model of the car you are buying, and the length of the loan.
If you have a good credit score, you may be able to get a used car loan with an interest rate as low as 3.5%. However, if your credit score is not as good, you may end up paying an interest rate closer to 7%.
The model and age of the car you are buying can also affect your interest rate. If you are buying a newer car, you may get a lower interest rate than if you were buying an older car.
The length of the loan can also affect your interest rate. A shorter loan will typically have a lower interest rate than a longer loan.
If you are looking to get the best possible interest rate on a used car loan, it is important to shop around and compare rates from different lenders. It is also important to have a good credit score and to buy a newer car.
How to Get the Best Car Loan Interest Rate
When you’re car shopping, the dealer will almost always offer you an auto loan with a higher interest rate than what you can get from a bank or credit union. It’s in their best interest to do so. They make money on the loan, after all. But you don’t have to accept their offer. You can get a lower interest rate on your own.
Improve Your Credit Score
One way to make sure you get a great interest rate is to improve your credit score. A higher credit score will help lenders feel confident about loaning you money, and as a result, you’ll usually get a lower interest rate. You can improve your credit score by paying all of your bills on time, including your car payment, and by keeping your credit card balances low. You can also avoid opening new lines of credit and closing existing ones, as this can have a negative impact on your score.
Get Pre-Approved for a Loan
The first step to getting a great car loan is to get pre-approved for a loan. You should get pre-approved for a loan before you start shopping for your new car. This will give you an idea of what interest rate you can expect to pay and will help you stay within your budget.
When you get pre-approved for a loan, the lender will do a hard credit check. This can temporarily lower your credit score by a few points. But it will also give you an accurate idea of what interest rate you’ll qualify for. And, if you find a good interest rate, it can be worth the temporary dip in your credit score.
To get pre-approved for a loan, visit your local bank or credit union or fill out an online application. Be sure to have all of the necessary documentation, including proof of income and asset statements. Once you’re approved, the lender will give you a pre-approval letter that includes the loan amount, interest rate, and terms.
Shop Around for the Best Interest Rate
The average interest rate on a new-car loan in November 2018 was 5.51 percent, down from 6.29 percent in November 2017, according to Experian.
But that average doesn’t tell the whole story. Your credit history, the type of vehicle you’re buying and the dealership you’re shopping at can all play a role in what kind of interest rate you qualify for on your car loan.
Here are some tips on how to get the best interest rate on a car loan:
1. Know your credit score and history. The better your credit score, the lower the interest rate you’ll qualify for on a car loan. You can check your credit score for free with Credit Karma to see where you stand.
2. Shop around for the best interest rate. Different lenders — including banks, credit unions and online lenders — offer different rates, so it pays to shop around to get the best deal. Used-car loans tend to have higher interest rates than new-car loans because used cars are more of a risk for lenders — they could break down at any time or turn out to have hidden damage from a previous owner.
3. Get preapproved for a car loan before you go to the dealership . When you get preapproved for an auto loan, you’ll know how much money you can borrow and what kind of interest rate you’ll be paying upfront, which takes some of the guesswork out of negotiating with a dealer . Getting preapproved is easy — most lenders just need to see some basic information about your finances , like your income , employment history and debts . After that , they can give you an idea of what kind of interest rate you could qualify for . If you have good credit , it might even be worth getting preapproved with multiple lenders so you can compare offers side by side and choose the one with the lowest interest rate .
4. Consider financing through the dealership . Many dealerships offer “ dealer financing , ” which means they will act as the lender on your car loan . They might offer special deals or promotions that other lenders don ’ t , so it pays to ask about those before committing to another lender . But remember : You always have the right to take your business elsewhere if you don ’ t like the terms being offered by the dealer .
Negotiate the Interest Rate with the Lender
You can use Bankrate’s auto loan refinance calculator to see if it makes sense to refinance your car loan.
Start by checking your credit score. You’re entitled to a free credit report from each of the three major credit bureaus every 12 months, and you can get them at AnnualCreditReport.com. If your score is 740 or higher, you’re likely to qualify for the best interest rates on a loan.
If your score is below that threshold, take steps to improve it before you apply for a loan. One of the best ways to improve your credit score is by paying down high balances on revolving credit accounts, such as credit cards. Also, make sure you make all of your payments on time — that includes everything from utility bills to student loans.
The next thing you should do is shop around for the best interest rate. Start with your local bank or credit union, but don’t stop there. You can use an online lending network, such as Bankrate’s lending marketplace, to compare loan offers from multiple lenders at once.
Once you have a few offers in hand, it’s time to start negotiating with the lender for a lower interest rate. Remember, the lender isn’t obligated to give you a lower rate just because you ask — but it never hurts to try!
When to Refinance Your Car Loan
If you’re paying interest on a car loan, you may be wondering if you’re getting the best deal possible. The answer to that question depends on a number of factors, including the current market conditions and the terms of your loan. In this article, we’ll take a look at when it makes sense to refinance your car loan.
Lower Your Monthly Payment
One reason to refinance your car loan is to lower your monthly payment. If you can find a loan with a lower interest rate than your current loan, you may be able to lower your monthly payment by refinancing. This can free up some extra money each month that you can use for other expenses.
Another reason to refinance your car loan is to get a lower interest rate. If you currently have a high interest rate on your loan, you may be able to save money in the long run by refinancing into a loan with a lower interest rate. This can help you save money on interest charges over the life of the loan.
You may also want to consider refinancing your car loan if you need to extend the term of the loan. If you are having trouble making your monthly payments, extending the term of the loan may help by lowering your monthly payment. However, this will also cause you to pay more in interest over the life of the loan.
Get a Lower Interest Rate
If you have good credit, you may be able to refinance your car loan and get a lower interest rate. This can save you money on your monthly payments, and it can also save you money over the life of the loan. If you have poor credit, you may still be able to get a lower interest rate, but it will probably be higher than what you would get if you had good credit. In either case, it’s worth shopping around to see what interest rates are available to you.
Get a Shorter Loan Term
A shorter loan term means you’ll have a lower interest rate and you’ll pay off your loan faster. If you’re able to swing it, try refinancing for a shorter term than your current loan. Even if your monthly payments are higher, you’ll save money in the long run because you’ll pay less interest.
Get Rid of an Upside-Down Loan
If you’re “upside down” on your car loan, meaning you owe more than the car’s value, you have several options. One is to keep making payments until the loan is paid off or the car’s value catches up to the loan balance. If refinancing isn’t an option and you can’t afford to continue making payments, your other choice is to sell the car and pay off the loan with the proceeds.