Interest rates for customers with bad or no credit will vary due to several factors, such as the length of the loan, work history, credit score, and more. In this article, we will review the different factors that impact the interest rate on a loan, so you’re ready to make the best decision when agreeing on a car loan.
There are many factors that go into determining the interest rate for your auto loan. These include:
You may have seen the term APR, for Annual Percentage Rate, before, and it is important to know the difference between APR and interest rate. Essentially, APR is the interest rate plus all associated fees to borrow the money for a loan. Both are important numbers, and when comparing rates between lenders, make sure you compare the APR of one to another, not the APR of one to the interest rate of another. According to the federal Truth in Lending Act (TILA), lenders are required to disclose all terms and rates on the loan, making it easy to compare rates.
The lower the credit score, the higher the interest rate. This is because credit score is an indicator of how reliable a person was with paying back debt in the past. Someone with a low credit score is viewed as more risky to lend to, since they have had previous trouble paying back money borrowed. Luckily, they can still get a car loan and rebuild their credit, albeit with a higher interest rate. Even someone with no credit and zero credit history can get a car loan.
These figures show the approximate average relationship between credit score and APR (as of June 2022) in the United States:
If you have a low credit score, it is still possible to take out a car loan, but you will be paying a higher interest rate. It is important to note that different lenders may have different terms for repayment. In some cases, there will be fees for early repayment, etc. so they should make sure to carefully review those terms.
Generally, car loans are between two to seven years. The longer the loan, the lower the average monthly payment, but the higher amount of interest you will pay over the term of the loan. To decide how long of a loan you should commit to, it is important to know how much of your income should be spent on your car.
Most budgeting experts agree that thirty percent of your total income is too high for a monthly car payment. They suggest ten percent going towards your car payment, and another five to ten percent on car expenses, like fuel and maintenance. It may be worth it to pay slightly more on your payments to pay less in interest over the term of your loan, but then you will be sacrificing on other parts of your budget, such as food, health, and entertainment. Ultimately, you must decide your ideal budget.
As for the down payment, the more, the better. The higher the down payment, the more likely you are to be approved, the less owed overall, and the lower the amount of interest paid over the life of the loan. However, it is still possible to get a car loan with a small down payment.
Basically, the more you pay on your car loan, the quicker you pay it off. This includes: