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A Good APR for a Car Loan Will Depend on…

December 22, 2020 | Vehicle Financing

So, you’re thinking about getting a car loan. You probably already know that you want the best APR* you can get. But what dictates the APR you can get approved for? What are the factors at play?

Here are some of the most important things to consider when figuring out what is a good APR for a car and what kind of loan you will be approved for.

What is APR for a Car Loan?

If you’ve been shopping for a car loan for any length of time, you’ve probably seen the term APR about a thousand times. But what does it mean?

APR stands for Annual Percentage Rate. It is the percentage rate for a loan that includes interest and any other fees you will be charged for. It is an all-encompassing rate which describes the amount you are paying to borrow money each year.

The lower the APR, the better. It’s extremely important to consider APR, as it directly affects the amount of money you will owe over the life of the loan.

Fixed APR vs. Variable APR

APR can be fixed or variable. Fixed means that the APR will be the same for the life of the loan. Variable APR means that as the U.S. prime interest rate changes, your APR will also vary. If you don’t have a cap on your loan, your interest rate could rise indefinitely.

For cars, fixed APR loans are the most common. Variable loans might save you money in the first year or so, but interest rates can be erratic, and it might end up costing you in the end.

What determines your APR?

There are quite a few factors that play into APR. What is a good APR for a car loan? What do you need to know to get an APR you can live with for the life of your loan? Continue reading to find out.

Your credit score

Your credit score is one of the most important factors in what APR you can qualify for. If you have impeccable credit, you may qualify for the lowest APR.

The difference in APR for buyers who have excellent credit versus those with poor credit can be more than 10%.

According to US News, in September this year, buyers with excellent credit (above 750) could get a loan for a new car with 5.07% APR. Buyers with good credit (700-749) obtained, on average, a 6.02% APR. Buyers with fair credit (600-699), on average, obtain a car loan with 11.40% APR. And, average buyers with poor credit (451-599) achieve 16.46% APR.

The car you are buying

The APR you can get for a new car is different than that for a used car. Used cars usually cost a bit more to finance. This is because they carry a higher risk for the lender.

Used cars are more likely to break down, potentially being totaled by damage. This could mean that you are left without a car and unable to pay your car loan back, in turn, the lender loses money.

Your down payment

As a general rule, the higher the down payment you can make, the lower your payment. Making a big down payment decreases the risk you’ll be “upside-down” on your loan. Being “upside-down” is when you owe more on the car than it is worth. A large down payment makes you a safer bet for a lender.

Car sales

Many car dealerships offer promotions that include a very low APR. For example, dealerships often offer 0% APR on certain car models. 0% financing sounds too good to be true, and if you’re not careful, it might be.

First of all, usually, only buyers with the best credit will qualify for these deals. Second, car salesmen will often try to “make up” for that lost interest by pushing features, warranties, and GAP insurance on you. Or, they might be less willing to negotiate on the purchase price.

These 0% deals are also typically only applicable to a very specific car. So be careful not to get sucked into a purchase you weren’t planning on.

The terms of a 0% loan are typically very strict. This might mean high monthly payments and a short time to repay. Be wary of your monthly budget when considering a 0% APR car loan.

If You Currently Have a Poor APR…

If you are unhappy with the APR you qualify for, or you have a car loan and the APR is too high for your liking, the good news is that you are not stuck. As you repay your loan and build your credit score, the APR you can access decreases.

Most car loans offer you the ability to refinance with a different financial institution. If you need a car now, and the APR is high, just know that if you are diligent in building your credit score and monitoring interest rates on the market, you can get out of that car loan.

To learn more about what kind of credit score you’d need to build up to get a great APR, check out our blog post on that topic!

A Good Credit Score for a Car Loan


*APR=Annual Percentage Rate

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