Credit Scores and Car Loans: How Your Bottom Line (APR) Is Determined

How a Good Credit Score Can Save You Big Bucks (But a Bad One Doesn’t Mean You CAN’T Get a Loan)


Today, the best credit score will get you an average APR of 3.336%


The importance of a good credit score can’t be understated when applying for any type of loan, but the particulars of loans vary depending on whether you’re buying a home or — in this case — a car. To get the best car loan rates, many experts would advise making sure you have an excellent credit score, minimal debt and a hefty down payment.

Although that’s true enough, it can be easy to get confused about credit scores and interest rates.

You might often hear that a score of 700 or higher is an excellent credit score, but what interest percentage that equates to is unclear. The fact is, the value of credit scores is relative and depends on the lender’s standards for creditworthiness.

Get a better understanding of auto loan rates by credit score so you can adapt your financial strategy to get the best rates possible.

Keeping Score With Your Credit

To better understand what you bring to the table, find out what your credit score is. Thanks to the Fair Credit Reporting Act, you’re entitled to receive a free copy of your credit report once each year from the national credit reporting bureaus — Equifax, Experian and TransUnion. Many credit cards now offer cardholders free access to their credit scores.

Your credit score is determined by five different elements of your financial behavior:

  • 35 percent based on payment history: how consistent you are about paying your bills
  • 30 percent based on debts owed: how much you owe on credit cards, loans and other types of accounts
  • 15 percent based on credit history: the length of time you’ve actively used credit
  • 10 percent based on new credit: how many new lines of credit have you opened
  • 10 percent based on types of credit: how many type of credit you have, such as revolving credit or installment accounts

The Higher the Score, the Lower the Rate

People who have higher credit scores are considered less of a risk — that is, they’re more likely to pay back the full amount of their loan on time — than those who have lower scores. Lenders reward these lower-risk consumers with lower interest rates. The credit score, in effect, grades a pattern of behavior and, based on this grade, interest rates are determined.

Because there are three credit reporting bureaus, you actually have three credit scores and three credit reports, each of which might differ from the others. If you get scores of 780, 707 and 804, don’t panic; there will always be minor discrepancies among your scores and reports due to the bureaus’ individual reporting criteria and scoring model. But in this case, the scores are close enough to indicate that your credit is excellent.

The same principle applies when it comes to determining the interest rate you’ll get based on your credit score: Generally, the higher the score, the lower the rate, and vice versa. For instance, breaks down its credit scoring and corresponding APRs for a 60-month loan on a new car into six categories:

Score Range APR
 720-850  3.336%
 690-719  4.66%
 660-689  6.753%
 620-659  9.399%
 590-619  13.719%
 500-589  14.806%
*Rates as of 8/30/2016

How Low Can You Go?

When it comes to securing an auto loan, always try to settle for less — in terms of APR, that is. One way to help yourself get a better interest rate on an auto loan is to print out your credit score and bring it with you if it ranks in the top tier; this could help with bargaining power. It also lets the dealer know that you’re aware of your score and what that means in terms of getting an appropriate APR.

In addition to your credit score, there are other factors that can affect the interest rate you get. Some of these include how old the car is, your debt-to-income ratio, down payment and the length of the loan term.

The type of car you buy will also affect your APR

Because used cars depreciate — that is, they lose their original value — interest rates for loans on older cars are higher than they are for new cars. This depreciation causes a lender to be less eager to lend money to used-car buyers.

At Chase, for example, the average interest rate on a 48-month loan for a new car is 2.89 percent versus the used car’s rate, with the same terms, which is 3.19 percent.

Debt-to-Income Ratio

Like your credit score, lenders also use something called a debt-to-income ratio to estimate your ability to pay a monthly loan. You can figure out your DTI by adding up your monthly debt — including loans, utilities and rent or mortgage — and dividing that sum by your gross monthly income.

Your interest rate decreases as your debt does, so it’s not a bad idea to pay off as much debt as you can before applying for financing.

Length of Term

An auto loan term refers to the time you have to pay back your loan. Simply put, you make monthly payments until the loan reaches the end of its term. Most loan terms come in a variety of lengths, such as 60 months, 48 months or 36 months.

Generally, new cars with shorter terms also get lower interest rates. The downside to shorter terms is that monthly payments are higher. If a buyer can afford bigger payments, then he’ll end up spending less money on interest than he would with a loan with a longer term and lower monthly payment.

Down Payment

A sizable down payment signals to lenders that you’re a less risky bet and it might even help you get a lower interest rate. The opposite is also true: Those with a small or no down payment who are asking to borrow a large sum of money are a greater possible liability for lenders. Only putting down a small down payment can lead to higher interest rates, which lenders put in place to mitigate any potential loss.