If you’re shopping for a used car, you’re probably wondering what kind of used car loan rate you can qualify for with your bank or credit union.
Questions about used car loan rates are common among our members. The interest rate you get plays a role in determining how much you can afford to spend. So, with that in mind, let’s talk about the role that credit scores play in determining the interest rates for used car loans.
What Role Do Credit Scores Play in Used Car Loan Rates?
The first thing you need to know is that your credit score is the biggest determining factor in the interest rate you get when buying a used car. That might seem obvious, but there’s more to it than that.
Your traditional credit score, or FICO score, sits on a scale between 300 and 850. People with a higher score will usually be able to get a more favorable interest rate than people with mediocre or poor credit scores. That’s true whether you’re applying for a mortgage or a credit card, too.
What you might not know is that car dealers and others in the automotive industry get a different report from the one you can get for free from the three major credit bureaus. It’s called a FICO Auto Score and it assigns a score between 250 and 900. It’s designed to do the best possible job of determining how likely you are to repay an auto loan.
The tricky thing about FICO Auto Scores is that you can’t get a copy of yours unless you’re in the automotive industry. So, the best we can do is to estimate the rate you’ll be able to get based on your FICO score.
Average Used Car Loan Rates Based on FICO Score
Now, let’s look at the average used car loan rates based on FICO scores. You’ll notice that there is a lot of real estate between the lowest rate and the highest one. Ideally, you want to apply for a car loan when your FICO score is high.
On average, the interest rates for used car loans tend to be a little higher than the average for new cars. That’s a reflection of the increased risk of buying a used car. The used car you buy may not have a warranty or service agreement. Even with a complete vehicle history, your lender will consider the potential for unforeseen problems. Here’s how the average rates break down as of early-2019, according to Experian Information Solutions, Inc.:
For people with a FICO score between 781 and 850, the average rate is 3.68%
For people with a FICO score between 661 and 780, the average rate is 4.56%
For people with a FICO score between 601 and 660, the average rate is 7.52%
For people with a FICO score between 501 and 600, the average rate is 11.89%
For people with a FICO score between 300 and 500, the average rate is 14.41%
Source: NerdWallet, 3/1/19
As you can see, there’s a big jump in the rate when your score falls below 661, and another big jump if your score is below 500. That’s because the risk to lenders goes up when the borrower’s score is below those numbers.
Tips for Boosting Your Credit Score and Lowering Your Interest Rate
If you have some time before you need to buy a used car, you may be able to do some repair work on your FICO score to improve your chances of qualifying for a low rate. Here are some tips:
Order copies of your credit reports from Equifax, Experian and TransUnion. You're entitled to one free copy per year.
Review your reports and correct any inaccuracies or discrepancies. You should be prepared to provide documentation and file reports as needed.
Pay down your debt if possible. If you’re carrying a lot of credit card debt, that can affect your score and your interest rate. Paying more than the monthly minimum can help bump your score.
Consolidate your debt on a low-interest credit card. If you can qualify for a new card with a low rate, it can help you save money on both your credit card debt and your car loan.
Make all payments on time or early. If you already have a long history of prompt payments, you won’t see much of an improvement. But, if your credit history is patchy, making prompt payments for six months or so can boost your rate.
You may not be able to get your score up to the highest tier, but spending a bit of time reviewing your report and repairing your credit can help you qualify for the best possible rate.
We can’t tell you what interest rate you’ll get when you apply for a used car loan, but we can tell you that repairing your credit and paying down your debt may help you get a better rate.
If you’d like to learn more about Addition Financial’s used car loan rates, please click here now.