Fair credit score auto loan rates

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Fair credit score auto loan rates

The national average for US auto loan interest rates is 5.27% on 60 month loans. For individual consumers, however, rates vary based on credit score, term length of the loan, age of the car being financed, and other factors relevant to a lender's risk in offering a loan. Typically, the annual percentage rate (APR) for auto loans ranges from 3% to 10%. Consumers with high credit scores, 760 or above, are considered to be prime loan applicants and can be approved for interest rates as low as 3%, while those with lower scores are riskier investments for lenders and generally pay higher interest rates, as high as 20%. Scores below 580 are indicative of a consumer's poor financial history, which can include late monthly payments, debt defaults, or bankruptcy. Individuals in this "subprime" category can end up paying auto loan rates that are 5 or 10 times higher than what prime consumers receive, especially for used cars or longer term loans. Subprime loans are sometimes offered to people buying a car with no credit. Consumers with excellent credit profiles typically pay interest rates below the 60 month average of 4.21%, while those with credit profiles in need of improvement should expect to pay much higher rates. The median credit score for consumers who obtain auto loans is 711. Consumers in this range should expect to pay rates close to the 5.27% mean. When combined with other factors relevant to an applicant's auto loan request, including liquid capital, the cost of the car, and the overall ability to repay the loan amount, credit scores indicate to lenders the riskiness of extending a loan to an applicant. Ranging from 300 to 850, FICO credit scores are computed by assessing credit payment history, outstanding debt, and the length of time which an individual has maintained a credit line. Average Interest Rates by Term Length Most banks and credit unions provide payment plans ranging from 24 to 72 months, with shorter term loans generally carrying lower interest rates. The typical term length for auto loans is 63 months, with loans of 72 and 84 months becoming increasingly common. The higher APRs of longer term auto loans, however, can result in excessive interest costs that leave borrowers `upside down'--that is, owing more on the auto loan than the car actually costs. Here's a closer look at average interest rates across various loan terms for those with the strongest credit. 36 Month4.21%48 Month4.31%60 Month4.37%72 Month4.45% While longer term loans allow for a lower monthly payment, the extra months of accumulating interest can ultimately outweigh the benefit of their lower short term cost, especially for the consumer purchasing an older used car whose value will depreciate quickly. Terms of 72 and 84 months are also usually available only for larger loan amounts or for brand new models. For example, when paid over the course of 48 months, a $25,000 loan at a 4.5% interest rate will result in monthly payments of $570 and a total cost of $27,364. When paid over the course of 84 months in $348 monthly payments, this same loan at the same interest rate costs a total of $29,190 -- more than $1,800 pricier than at 48 months. For higher interest rates, the difference between short and long term payments will be even greater. Average Rates for Auto Loans by Lender Auto loan interest rates can vary greatly depending on the type of institution lending money, and choosing the right institution can help secure lowest rates. Large banks are the leading purveyors of auto loans. Credit unions, however, tend to provide customers with the lowest APRs, and automakers offer attractive financing options for new cars. Banks and Credit Unions Most banks who offer auto loans provide similar rates as low as 3% to the most qualified customers. However, there is much variance amongst banks in the highest allowed APR, with top rates ranging from as low as 6% to as high as 25%. Banks who provide higher rate loans will generally accept applicants with worse credit, while more risk averse lenders won't offer loans to applicants with scores below the mid-600s. The typical large bank has specific eligibility requirements for loans, including a mileage and age maximum for cars, and a dollar minimum for loans. Generally, credit unions extend loans at lower interest rates than banks, have more flexible payment schedules, and require lower loan minimums (or none at all, in some cases). However, credit unions tend to offer loans exclusively to their membership, which is often restricted to certain locations, professions, or social associations. Alliant3.24%18.19%CapitalOne3.99%13.98% PenFed1.99%18%PNC Bank2.79%14.99% Dealerships Automakers like Ford, GM, and Honda also provide loan financing options on new cars purchased from their dealerships. This type of financing is gaining popularity amongst new car buyers and comprises about half of all auto loans. Automakers provide baseline APRs as low as 0 or 0.9% to compete with traditional financiers like banks and credit unions, while also incentivizing customers to purchase a new car off the dealer's lot rather than a used vehicle from another vendor. Low rates are restricted to the most qualified customers with excellent credit profiles, and not all loan applicants will be approved to receive credit from automakers. How Average Interest Rates Vary for Loans for New and Used Vehicles The average interest rates on auto loans for used cars are generally higher than for loans on new models. Higher rates for used cars reflect the higher risk of lending money for an older, potentially less reliable vehicle. Many banks won't finance loans for used cars over a certain age, like 8 or 10 years, and loans for the older models that are allowed often carry much higher APRs. One leading bank offers customers with good credit interest rates as low as 2.99% for purchasing a new model, but the minimum interest rate for the same loan on an older model from a private seller rises to 5.99%. The typical auto loan drawn for a used car is substantially less than for a new model, with consumers borrowing an average of $20,446 for used cars and $32,480 for new. However, terms longer than 48 or 60 months are generally not allowed for older model used cars, as the potential risk for car failure grows with age. Historical Auto Loan Rates Auto loan rates are at historically low levels as a result of an overall low interest rate environment. Over the last decade, the average interest rate on a 48 month auto loan from a commercial bank has fallen by over 40%. This is largely a result of the 2009 financial crisis, after which interest rates were lowered to incentivize consumers to stimulate the economy by spending on items like cars rather than saving. Loans from auto finance companies have historically carried lower rates than loans from commercial banks. The large car manufacturers have "captive finance" arms (e.g. Ford Finance, Chrysler Capital, GM Financial) that exclusively provide loans for consumers purchasing the parent company's cars; this enables automakers to provide lower rates, as the car purchase, rather than the interest, is the manufacturer's primary revenue stream. *The Federal Reserve stopped reporting data on auto finance company interest rates after 2011. Sources "Consumer Credit - G.19" Federal Reserve US Bank Auto Loans Chase Auto Loans Calculator myFICO Auto Loan Calculator S&P Global Market Intelligence Photo Courtesy: EXTREME-PHOTOGRAPHER/E+/Getty Images Getting a new car (or just new to you) can be exciting, but it also brings some pressure if you don't have the funds to pay for the car outright -- and most people don't. Of course, financing options are plentiful for vehicle purchases for people with great credit histories, but those options start disappearing quickly if you don't have a solid credit history to back up your promise to pay. Some people ask family members or friends to co-sign auto loans for them, but others aren't comfortable with this approach and prefer to build credit on their own. The process for obtaining a car loan on your own with no credit is more challenging, but it isn't a lost cause. You could start by taking steps to build a credit history before purchasing -- applying for a credit card with good approval odds, for example -- but if you need to purchase a car soon, then you won't have time to wait on that approach. Fortunately, whether you're a young first-time borrower or a seasoned consumer who paid for purchases in cash in the past, you can increase your approval odds by following some basic tips. Here's what you need to know about getting a car loan with no credit.Check Your Credit Score: No Score vs. Low ScoreIn the U.S., three main credit bureaus -- Equifax, TransUnion and Experian -- gather and store credit history information on consumers. If you have never borrowed money from a lender or opened a credit card or other type of credit account, then you shouldn't have a documented credit history with any of the credit bureaus, which results in no credit score (zero scores do not exist). It's also possible to have no score if you haven't used credit in many years. Most negative credit information is removed from reports after seven years, but even good accounts are removed after they don't have any activity for 10 years, which results in credit bureaus no longer producing a credit score. Photo Courtesy: PeopleImages/E+/Getty Images One important thing to remember is that having a low credit score is not the same thing as having no credit history, and lenders will treat these situations differently. If you have used credit before and had issues that damaged your score, you will need to review tips for getting a car loan with bad credit, as some of the advice will be different. You can request your credit report and score online via the bureaus' websites or use one of several services, such as Credit Karma, to view your information online.Be Prepared to Prove the Details on Your ApplicationOnce you've confirmed that you don't have a credit history or credit score with any of the credit bureaus, then you can focus on ways to solve this problem. In most cases, both prime (good credit) and subprime (bad credit) lenders automatically resort to using credit scores to assess the likelihood that applicants will be able to pay their mandatory monthly loan installments. That means you can probably expect your loan request to be initially declined, but that decision isn't always final. Photo Courtesy: JGI/Jamie Grill/Getty Images Without a credit score to back you up, you need to be prepared to offer alternative evidence and information that supports your ability to make payments. If a car dealership submitted your loan application, then a loan expert in the finance department will contact the lenders for you to try to negotiate an approval by offering relevant documentation about your finances, such as proof of income, bank statements, rental payment history, utility payment history and any unreported payment histories -- furniture leases, etc., that weren't reported to credit bureaus. If you applied directly to a bank or finance company, you will need to contact the loan officer yourself to discuss approving your loan based on supporting documentation.Improve Your Odds: Income DocumentationIf you want to convince a lender that you are a worthy credit risk without a credit file and score to back you up, then you need to provide as much information as possible to support your ability to pay. In terms of income, the more you make, the better, but the actual amount required to qualify depends on a calculation known as debt-to-income (DTI). This calculation takes your total debt payments each month -- including rent and the potential car loan payment -- and divides the amount by your total gross income. The acceptable DTI percentage varies a great deal among lenders and could be as high as 40% to 50% in some cases but is often somewhere around 36% for prime lenders. Photo Courtesy: MoMo Productions/DigitalVision/Getty Images For auto loans, many lenders use the payment-to-income (PTI) percentage instead of DTI. This calculation divides the estimated payment (plus car insurance) by your total income. Most lenders decline loans when this percentage exceeds 15% to 20%, although this also varies among lenders. Ideally, you want to meet the approval standards for both of these calculations to increase your chance of success. If you go to a dealership in person, take relevant income documentation with you. Paycheck stubs covering at least a two-month period are one of the best ways to prove your income is steady and reliable. If you decide to use income tax returns instead of pay stubs, then provide multiple years (if possible) to show the steady continuity of your income. Bank statements can also provide proof of your typical income and cash flow.Improve Your Odds: Price and Down PaymentIt can be very tempting -- especially when buying your first vehicle -- to let all those new cars lined up at a dealership mesmerize you with their shiny appeal. If you want to increase your odds of approval, you need to fight the urge to pick a flashy, expensive car. Lenders will be much more willing to give you a chance on your first car loan if you choose a modest used car in a reasonable price range -- or at least a very reasonably priced, economy-class new car. Photo Courtesy: nikom khotjan/Moment/Getty Images You've probably seen plenty of TV ads for new cars with no down payments and no (or low) interest rates. That won't apply to your situation, and your best chance of success includes agreeing to make a substantial down payment on the vehicle you want to purchase. According to Edmunds, the historical standard for a down payment was once 20%, but rising car prices in the last decade have brought that number down. As someone applying for a car loan without credit, you could gain substantial bargaining ground if you offer a 20% down payment. At the very least, you should expect to be asked for a sizable down payment, even if the percentage is much lower, but large down payments do come with some benefits. It may be difficult to convince a lender to give you their best interest rate, so a smaller loan amount adds up to smaller monthly payments and much less interest paid over the life of the loan.Improve Your Odds: Special ProgramsOne of the best ways to improve your odds of approval for a car loan is to look for dealerships that offer special programs for first-time buyers. These programs often focus on college students or recent graduates -- college or even high school -- but it's possible to find other types of first-time buyer programs as well. These programs are specifically designed to help buyers who wouldn't qualify for loans in traditional ways. They still include specific qualifying criteria, but it may be easier for applicants to meet the requirements. Examples of these qualifying factors include a good GPA, a large down payment and a limited loan amount.Photo Courtesy: sturti/E+/Getty Images What to Avoid: Buy Here, Pay Here FinancingSome car dealerships lure customers in with tempting offers of no credit checks and approvals for every buyer. The main problem is this type of financing almost always comes with interest rates that could climb as high as the state maximum, which could be 20% APR or more. Some of the other terms could be questionable as well. To add insult to injury, these dealerships don't usually report your payments to the credit bureaus, which means you pay an outrageous amount for your car and still don't build any credit history.Photo Courtesy: SteveLuker/E+/Getty Images Beyond the Dealership: Alternative First-Time Financing OptionsWhen it comes to approving borrowers for their first loans -- auto, mortgage and otherwise -- some financing sources have a reputation for being more open to newcomers than others. Credit unions and smaller local banks (versus giant national banks) have long been recognized as valuable sources of loans for those who are challenged by no credit, minimal credit or even poor credit situations. This is especially true if you already have an existing relationship with the bank or credit union. Some online lenders also specialize in car loans for buyers with no credit, but any online lender should be thoroughly researched before applying. Photo Courtesy: gahsoon/E+/Getty Images If all else fails, borrowing the money from family is a tried-and-true option for many buyers, even those who have had car loans before. The pitfalls of this option are obvious, so if you go this route, it's best to write up and sign a firm agreement that outlines all the details of the loan and its repayment terms to avoid future misunderstandings that could cause a family rift. You also don't build a credit history with this type of loan, but you just might get an interest rate that would be impossible to beat. MORE FROM BLOGLINES

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