What Is the Average Used Car Loan Rate?

Article originally published July 13th, 2016. Updated December 6th, 2022. Just a few years ago, nearly one in three drivers chose to lease rather than purchase a vehicle. Today, however, less than one in five drivers lease their cars. Why such a dramatic shift? While there are many reasons for this change, the primary cause... Read More

The post What Is the Average Used Car Loan Rate? appeared first on Credit.com.

Article originally published July 13th, 2016. Updated December 6th, 2022.

Just a few years ago, nearly one in three drivers chose to lease rather than purchase a vehicle. Today, however, less than one in five drivers lease their cars. Why such a dramatic shift? While there are many reasons for this change, the primary cause for this drop in leased vehicles is cost.

The combination of the inventory shortage and inflation has resulted in higher new car prices. Higher costs mean higher leasing fees. However, as car prices begin to stabilize, it’s likely many drivers will consider leasing again. After all, leasing typically allows you to obtain a newer car with lower monthly payments.

When looking for a new or used car, it’s important to explore your options to determine if leasing or taking out a car loan is the right option for you. Here’s some more information about car loans and average interest rates for used car loans.

What Is the Average Rate for a Used Car?

No matter what financial institution you get a car loan through, the amount of interest you owe likely depends on your credit score and whether you’re a prime or subprime consumer. The Consumer Finance Protection Bureau divides consumers into four credit tiers based on credit scores.

• Prime: Borrowers with credit scores over 680
• Non-Prime: Borrowers with credit scores between 620 and 679
• Subprime: Borrowers with credit scores between 540 and 619
• Deep Subprime: Borrowers with credit scores under 540

While average used car interest rates fluctuate based on various factors, below is a look at the average rates per credit score for November 2022.

• Credit score of 750 or higher: 9.56%
• Credit score between 700 and 749: 10.99%
• Credit score between 600 and 699: 15.41%
• Credit score between 451 and 599: 20.43%
• Credit score of 450 or lower: 22.26%

What Is a Good Rate on a Car Loan?

The best rates for car loans are reserved for those consumers with excellent credit. These borrowers may be able to find a car loan for 5% or lower. This is considered a very good interest rate.

In fact, 5% is one of the lowest APR rates for used car loans. The typical used car interest rate, however, is much higher than 5%.

How to Get a Car Loan

If you’re considering applying for a used car loan, the first thing you want to do is to evaluate your budget. Carefully calculate both your monthly income and monthly expenses to determine exactly how much you can afford to pay towards a used car loan. It’s also recommended to read a car loan guide to better understand how the lending process works.

Next, you want to gather all the necessary documents so you have everything ready when your lender requests them. Below is a look at the most common documents requested by lenders.

• Proof of identity: You need some official form of identification, such as a state-issued driver’s license or identification card.
• Proof of residency: Lenders typically want your proof of residency, such as a lease, deed or utility bill.
• Proof of income: You also need proof of income, including paystubs, tax returns and bank statements.
• Social Security number: All lenders use Social Security numbers to run credit reports, so be sure you have your number readily available.

Finding a Lender

While there’s no shortage of lenders you can contact for a used car loan, you may want to start with your local bank. Having a longstanding relationship with your bank may help you obtain the loan you need. You can also contact other banks in your local area to see what auto loan options they offer.

You don’t have to stay local, however. There are a number of online lenders that allow you to complete the entire application and loan process online. No matter which lending option you choose, the important thing is to shop around to find the best rates.

When comparing lenders, be sure to not only compare monthly payments but also check interest rates and terms. Using an APR calculator can help you compare monthly payments for different loan terms and amounts

Know Your Credit Scores

As mentioned above, your credit score directly impacts the interest rate on your auto loan. These interest rates, in turn, determine the overall costs to purchase a used car, loan terms and how much your monthly payments are.

This factor makes it crucial that you know your credit score and try to keep it as high as possible. Before you even apply for a used car loan, request a free copy of your credit report from all three top credit reporting agencies, Equifax, TransUnion and Experian.

If you find any errors in your report, take the necessary steps to fix these errors quickly. Also, take steps to repair any negative issues on your credit report that could be lowering your score. Keep in mind that obtaining a used car loan may impact your credit score as well.

Will a Car Loan Improve My Credit Score?

You might think that obtaining a car loan could negatively impact your credit score. The reality is that in many cases, a car loan can actually improve your score. As long as you continue to make on-time payments, a car loan, also referred to as an installment loan, can help boost your score over time.

Conclusion

When searching for a used car, it’s extremely important to evaluate all your options. For example, compare your lending and leasing options and shop around for the best interest rates. If you’re ready to purchase a used car, start comparing your options today by using Credit.com’s auto loan calculator tools to compare your rates, customize your terms, and find a trusted lender.

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