How does a lender decide what interest rate to offer me on an auto loan? | Consumer Financial Protection Bureau (2024)

FAQs

How does a lender decide what interest rate to offer me on an auto loan? | Consumer Financial Protection Bureau? ›

An auto lender considers several factors – including your credit score, your credit history, income, debts, and down payment – when deciding what interest rate to offer you. Auto lenders will generally consider a number of factors when they're determining the interest rate and loan terms to offer you.

Among others, these factors typically include credit history, amount financed, length of the term, age of collateral, vehicle, and the down payment. The better your credit, the lower the interest rate.

Lenders consider your credit score, payment history and the current economic conditions when determining interest rates. Generally speaking, the higher your credit score, the less you can expect to pay in interest. But loan-specific factors such as repayment terms play a role too.

Your credit score is one factor that can affect your interest rate. In general, consumers with higher credit scores receive lower interest rates than consumers with lower credit scores. Lenders use your credit scores to predict how reliable you'll be in paying your loan.

Yes, just like the price of the vehicle, the interest rate is negotiable. Dealers may not offer you the lowest rate that you qualify for. To get the best interest rate, shop around with multiple lenders and negotiate.

For example, the interest on a $30,000, 36-month loan at 6% is $2,856.

An interest rate under 5% is a great rate for a 72-month auto loan. However, the best loan offers are only available to borrowers who have the best credit scores and payment histories.

The size of your down payment has a direct impact on the interest rate your mortgage lender sets. The larger the down payment, the lower your interest rate may be. A lower interest rate can help you save money by paying less interest over the life of the loan.

A high-interest loan charges interest and fees that are higher than most other loans. Typically, a loan with an annual percentage rate, or APR, over 36% is considered a high-interest loan. If you need cash fast or have low credit, you may be offered a high-interest loan or feel like you don't have any other options.

In general, the higher your credit score, the lower your rates will be. However, dealers and lenders are not required to offer you the best available rates. The best way to reduce your costs is to shop around and compare rates between different lenders.

How does down payment affect interest rates? ›

Lower interest rates

Borrowers who put down more money typically receive better interest rates from lenders. This is due to the fact that a larger down payment lowers the lender's risk because the borrower has more equity in the home from the beginning.

Different lenders have different credit underwriting criteria. All will consider your credit score, income and debt-to-income ratio, but lenders differ in what they find acceptable. Some may consider your education or professional experience, too. Plus, some lenders simply offer lower rates than others.

The law says that lenders cannot charge more than 16 percent interest rate on loans. Unfortunately, some lending companies owned by or affiliated with vehicle makers have devised schemes whereby you are charged interest at rates exceeding the maximum permitted by law. This is called usury.

Car Loan APRs by Credit Score

Excellent (750 - 850): 2.96 percent for new, 3.68 percent for used. Good (700 - 749): 4.03 percent for new, 5.53 percent for used. Fair (650 - 699): 6.75 percent for new, 10.33 percent for used. Poor (450 - 649): 12.84 percent for new, 20.43 percent for used.

Most people know that their credit score is one of the top determining factors in what kind of rate they will receive. The lower the credit score, the higher the interest rate, and the higher the credit score, the lower the interest rate.

The Federal Open Market Committee (FOMC) sets the benchmark rate, which impacts the rates auto lenders set. When the federal funds rate increases, financing a vehicle will likely be more expensive. The Fed has increased the benchmark rate 11 times since the start of 2022.

Because of this, low credit scores often lead to higher interest rates as high as 20%. On average, bad credit gets you an average of 18.77% on a new car loan and 19.02% on a used car loan.