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A lot of experts will recommend buying a late-model used car over buying new. The main reason for this is that you don’t spend the first several years just paying for the car’s depreciation. They’re also generally much more affordable.
However, this isn’t the era of $1,000 beater cars anymore. According to Experian data, the typical used car loan is between $20,000 and $28,000, with a term of more than 60 months.
The same data also tells us that interest rates for used car loans are also quite high. Depending on your credit score, your auto loan interest rate may look like something you’d get on a luxury credit card. This doesn’t need to be the case, though.
The higher your credit score, the lower your APR
There’s one surefire way to get the best interest rates on your auto loan: have a great credit history. A high credit score will get you the lowest rates possible.
Here’s a look at the average rate for a used car loan by credit score:
| Credit Score Range | Avg. Rate for a Used Car Loan |
|---|---|
| 781 to 850 | 7.13% |
| 661 to 780 | 9.36% |
| 601 to 660 | 13.92% |
| 501 to 600 | 18.86% |
| 300 to 500 | 21.55% |
As you can see, folks with bad credit may be paying a rate more than three times higher than the borrowers with excellent credit. Your interest rate sets the cost of your loan and has a huge impact on your monthly payment.
Pro tip: Having great credit can actually help you get a lower rate on your auto insurance, too.
Top scores pay $188 a month less on $25K auto loan
So, what do those interest rates mean in the real world? Well, the final numbers will depend on your specific loan amount, fees, and so on. But let’s look at a typical example.
Let’s assume a $25,000 loan with a 60-month term. Here’s a look at the monthly payments and total loan cost based on the same APRs we saw above:
| APR | Monthly Payment | Total Vehicle Cost |
|---|---|---|
| 7.13% | $496.56 | $29,793.89 |
| 9.36% | $523.34 | $31,400.27 |
| 13.92% | $580.67 | $34,840.20 |
| 18.86% | $646.59 | $38,795.37 |
| 21.55% | $684.09 | $41,045.50 |
From one extreme to the other, you’re looking at a difference of about $188 a month. Multiply that by 60 months, and the person with excellent credit will pay $11,252 less for the same $25,000 car as someone in the lowest score bracket.
Your score also impacts the size of your loan
In the above example, we assumed that everyone gets the same $25,000, 60-month auto loan. But in reality, the people at the lower end of the credit spectrum may not qualify for such a large loan without a substantial down payment.
The better your credit is, the more likely you are to get as much financing as you need — without having to jump through hoops to get it.
A down payment can help balance low scores
Building your credit is the best way to improve your rates and loan size. However, you can also up your appeal as a borrower by bringing a good-sized down payment to the table.
If your current vehicle has a decent trade-in value, this could be the simplest solution. Otherwise, you’ll need to offer a cash down payment, which may take some time to save up, so it’s best to start saving well before you plan to buy the car.
Keeping your down payment in a high-yield savings account can help it grow while you save up. Consider our favorite high-yield savings accounts to take advantage of APYs of 4% and higher.
A cosigner can also help you get approved
Another option for getting approved for an auto loan with a bumpy credit history is to have a cosigner with good credit. You can essentially piggy-back off their good credit, both improving your ability to get approved as well as (potentially) your APR.
The cosigner is taking a risk, however, as you will both be equally liable for the loan. If you default on the loan, both of you will suffer a lot of credit damage. Make sure you can 100% manage the loan before asking anyone to cosign.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Brittney Myers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
