Car prices have been making headlines lately because of record-high levels, but the price listed on a vehicle’s window sticker isn’t the only cost shoppers should be aware of when shopping for a new or used car. The annual percentage rate (APR) that borrowers are paying on their auto loans is also climbing, which can add thousands or even tens of thousands to the cost of a new or used car.
The APR is the interest that lenders car loan rates charge to borrow money, which allows them to cover their expenses and make a profit. When determining your car loan rate, lenders consider your credit score, the amount of the loan and the loan term. A lower credit score and a longer loan term will typically result in a higher interest rate.
Several factors impact the APR on a car loan, but your credit score is generally the most important factor. Lenders set their rates by using a credit score to determine whether you’re likely to pay back the loan on time and in full. Generally, a lower credit score will result in a higher APR, but the good news is that you can shop around and find lenders who offer workable rates for your financial situation.
The lender type you choose will also impact your car loan rate, though to a lesser extent. For example, according to Experian, automakers’ in-house financing arms tend to have the lowest average rates for both new and used cars. Banks, credit unions and loan matching services typically offer competitive rates as well, but they’ll vary depending on your credit profile.
If you’re interested in purchasing a new or used car with a low-interest rate, it’s helpful to compare rates at various banks, credit unions and online lenders. Many of these companies offer an online application that allows you to see competing offers without a hard credit pull. Some even offer prequalification to help you determine your eligibility for certain loan types and terms.
For example, the Consumers Credit Union accepts anyone who pays a $5 fee and keeps at least $5 in their savings account. It offers both purchase and refinance auto loans with a range of terms, including two-and-a-half to three years. This is a much shorter loan term than the six to seven year loans that were more common in 2004.
Another factor that can influence your car loan rate is the loan-to-value ratio, which measures how much of the actual cash value (ACV) of a vehicle you’re borrowing against. A higher loan-to-value ratio will typically yield a higher interest rate because it’s considered more risky for the lender. A large down payment can reduce your loan-to-value ratio, helping you qualify for a lower interest rate. However, a low loan-to-value ratio is generally necessary to qualify for any auto loan. It’s essential to carefully weigh all of your options before deciding which one is best for you.