auto financing guide
Rates, Credit, Loans & More
Your auto financing rate refers to the APR for your loan. You want to check your credit in advance of getting a new vehicle because the higher your credit score, the lower your interest rate, and the less you’ll pay on your loan over time. For example, if your credit score is between 690 and 719, your average interest rate will be 4.95%. On a $25,000 60-month loan, you will pay $3,273 in interest.
To the contrary, If your credit score is 100 points lower, between 590 and 619, your average interest rate will be 14.06%. On a $25,000 60-month loan, you will pay $9,949 in interest. A 100-point credit score reduction can cost you over $6,000 in interest alone. That demonstrates the power and importance of your credit score and the APR you qualify for.
The average auto loan is for 60-months or five years, though some companies offer six and even seven-year loans. The best practice is to choose a loan that you can pay off as quickly as possible. While longer loans decrease your monthly payment, you pay more over the life of your loan.
For example, if you purchase a $25,000 car with a 4.95% APR on a 60-month term, you will pay $471 per month and $3,273 in interest over the life of the loan. If you purchase the same $25,000 car with a 4.95% APR on a 48-month term, you will pay $575 per month and $2,608 in interest over the life of the loan. That’s a savings of over $600 in interest, just by paying the loan off one year earlier.
Different Types of Auto Financing
There are many options available for securing an auto loan these days. Whether your score is in the upper 700s or falls below 600, there is generally a lender who can help you obtain a loan.
Banks & Credit Unions
Getting pre-approved by a bank or credit union allows you to walk into the dealership prepared to make a purchase with terms that work for you. Credit unions tend to offer the lowest interest rates.
If you get financing through the car dealership, be prepared to negotiate terms because this can be one of the most expensive options.
Buy Here, Pay Here
These dealerships tend to market their services to customers with less than perfect credit. Since they are working with buyers who have fewer auto financing options, their interest rates tend to be the highest. If this is your only option, we recommend that you improve your credit to qualify for better terms.