What is a Good APR for a Car?
The annual percentage rate (APR) of a loan is the interest rate. This rate determines how much interest the buyer pays for their financing. Interest rates can vary significantly, and the largest factor that influences the APR is the individual’s credit score.
What is a good APR for a car? Buyers might wonder if they secured a good rate or a not-so-great rate. Not only does the interest rate depend on a buyer’s credit score, but the interest rate also is impacted by these factors:
- Length of the loan
- Whether the car is new or used
- Down payment
- The market rate
What is the Best APR?
The best APR for a car loan is 0 percent. However, not all buyers will be able to qualify for an interest-free loan. These loans are usually tied to dealership promotions and they are incredibly popular.
Since interest rates are based on an individual’s credit worthiness or their credit risk, the best rates can vary considerably. For those with outstanding credit scores, a good interest rate might be as low as two percent for a new car. Individuals with low or poor scores might be offered double-digit interest rates, though.
How Does the Length of the Loan Affect APR?
Yet, longer loan terms (like 84 months) might come with higher interest rates. While this isn’t always the case, those who opt for longer loans will pay more in interest over the course of their loan.
Longer loans also could be preferred by those who have low credit scores because their interest rate is high. Thus, choosing a longer loan could allow them to afford the vehicle they need.
Do New Cars Have Lower Rates?
Buying a new or used car also will impact interest rates. Financing for used cars might come with higher interest rates. For those who want the lowest APR possible (in correlation to their credit score), buying new might be the best option.
Yet, while the loan APR might be higher for used vehicles, the purchase price can be significantly lower. Buyers will need to weigh the pros and cons of buying used versus new and find financing that fits easily into their budget.
The Size of the Down Payment
NerdWallet recommends that car buyer’s allocate 20 percent for a down payment when purchasing a new car and a 10 percent down payment when buying a used vehicle. The larger down payment for a new car helps offset the decreased value of the vehicle from depreciation.
The size of the down payment, though, also could influence the interest rate. Experian explains that those with lower credit scores who are able to make a larger down payment might receive lower rates.
There are other benefits of making a higher down payment, though. This up-front payment lowers the overall price of the car and helps cover the depreciation. A larger down payment could lead to lower monthly payments over the life of that loan, too.
The Federal Reserve’s Influence
The Federal Reserve doesn’t set interest rates for consumer loans, but the Fed’s rates have an influence on consumer rates. The actions of the ‘Fed’ help set the rate banks pay when they borrow from other banks. If interest rates are higher, banks might then increase the rates that they offer consumers.
Lower interest rates for banks can lead to lower consumer rates, too. This is why consumers rush to buy cars and homes or refinance current loans when there are rumors about ‘the Fed’ raising interest rates.
Can Buyers Influence Their APR?
Car buyers aren’t necessarily at the mercy of lenders. Consumers can control some aspect of their interest rate, and their control lies in their credit score. An individual’s credit score is determined based on several factors. Here’s how the credit score is broken down:
- Payment history (35 percent)
- Outstanding balances (30 percent)
- Credit history length (15 percent)
- New credit (10 percent)
- Mix of credit (10 percent)
The best move that a consumer can make to positively influence their credit score is to make timely payments. This factor comprises the majority of the credit score.
In addition, outstanding balances also heavily impact the score. Keeping lower balances could bump up the score, as this frees up the individual’s available credit.
What is a Good Credit Score?
If a consumer’s credit score affects their interest rate, how can consumers understand their score? Every year, consumers are eligible to receive a free credit report. These reports can help better understand an individual’s credit score and also find errors that can affect their score.
While the score that these reports show won’t be the exact score that banks see, they can provide a general indication of creditworthiness or risk. Credit scores are range from 300 to 850, and here’s how scores are rated:
- 720 to 850: Excellent
- 690 to 719: Good
- 630 to 689: Fair
- 300 to 629: Bad
Consumers with excellent credit might have their pick of the best loans. They might even be able to secure 0 percent interest rate loans at dealerships
Shop Around for the Best APR
Finding the best interest rate might take some time and a bit of research. Car buyers can use Carzing to get pre-qualified for financing. This process doesn’t guarantee the buyer a specific interest rate, but it helps car buyers understand their loan options.
Getting pre-qualified is simple. Carzing will require consumers to enter data about their job history and home payments (mortgage or rent). They also can enter in any applicable value of a trade-in; this amount will be applied to the loan amounts and terms.
Carzing will show consumers numerous loan options. They can compare interest rates and loan terms, too. Carzing also will include the down payment expectations for each loan.
When car buyers find the loan they prefer, they can print out a voucher with the details to present at a participating dealership. When they visit the dealership, buyers will still need to complete a credit application to secure their financing.
What’s the difference between getting pre-qualified and getting approved? When a buyer opts to get pre-qualified, they don’t need to enter their social security number. Pre-qualification is a soft credit inquiry.
However, getting approved for financing is a hard inquiry. This means that lenders will access their credit history and their credit score. Getting approved analyzes the full credit risk of the applicant.
The best way for consumers to qualify for the best (lowest) APR is to have a healthy credit score. Before shopping for a car, request a credit report. Review the credit scores and check over all the details in the reports to make sure there are no errors.
When a consumer has access to their credit information, they can better understand their credit risk or creditworthiness as it relates to their potential APR. While those with lower credit scores might face higher rates, they can still shop around to find the lowest option. Even a small rate difference can make an impact on monthly payment obligations.