As the Federal Reserve prepares to make potential interest rate cuts this fall, any action will most likely affect auto loans, along with other lending products. Being financially prepared for changes in interest rates will help ensure you get the lowest loan rate possible if you decide to buy or refinance a car or truck.
One of the best ways to be proactive is to know your current credit score and understand just how auto loan rates are affected by it. Lenders use your credit score as a factor in determining the annual percentage rate (APR) they will offer you when you apply for a vehicle loan.
In this blog, we will discuss auto loan interest rates by credit score, ways you can improve your score and what you can do to prepare for rate drops, such as pre-qualifying for a vehicle loan at Travis Credit Union.
What Are the Average Car Loan Interest Rates for Different Credit Scores?
Your credit score influences whether you will qualify for a loan and how much you will pay in interest. When it comes to auto loans, the higher the credit score, the lower the interest rate will be.
According to NerdWallet.com, the national average interest rates for individuals with credit scores from 781 to 850 (using data from Experian, a consumer credit reporting company) was 5.38% APR on a new vehicle loan and 6.80% APR on a used car or truck. Those with lower credit scores, from 300 to 500, were 15.62% APR for new loans and 21.57% APR on used auto loans, which are significantly higher.
It is important to note financial institutions have different tiers of categorizing credit score ranges for vehicle loan rates, so it’s best to shop around the various credit unions and banks to find the lowest rate possible based on your credit. Over the past two years, auto loan interest rates have increased significantly due to the Federal Reserve increasing rates to counter rising inflation. With the Fed now poised to lower the base rate, it may pay to watch how rates change over the second half of 2024 before obtaining a loan.
How Does Your Credit Score Impact Your Car Loan Terms?
A loan is taken out over a certain period of months, known as a term, during which the borrower must make monthly payments on the loan or face penalties and potential default. Your credit score will not determine the length of your loan term, but a longer term will mean you will be paying more interest on your loan.
The average terms available on auto loans, according to Bankrate.com, range from 24 to 84 months. Shorter terms will have higher monthly payments and tend to have lower interest rates. Alternatively, longer terms will have a lower monthly payment but a higher interest rate, which means a higher monthly payment.
The reason longer terms have higher interest rates is because they are riskier for lenders. There is more time for a potential negative change to a borrower’s financial standing, which means more chance for a defaulted loan.
When selecting a term for your loan, consider expenses, such as your monthly payment, insurance, yearly registration, maintenance costs and commuting costs, like tolls. This will give you an insight into what loan term works best for your budget. A great tip is to get pre-qualified or pre-approved on your loan, so you will know how much you can borrow and have a general idea of what your payments will be at various terms. At Travis Credit Union, you can check to see if you are already pre-qualified for a vehicle loan by checking your offers with us.
How To Improve Your Credit Score Before Applying for a Car Loan
Your credit score has a significant impact on whether you will be approved for a car loan. The higher your score, the greater the possibility of being approved. But what if you don’t have an excellent credit score? Fortunately, there are ways to improve it.
Start with obtaining your credit report from one of the three U.S. credit bureaus. By law, you can get a free report each year at AnnualCreditReport.com. Your credit report lists all of the credit that has been given to you, the amount of debt you have on each account and your payment history with each lender. Review the report to ensure it is correct and dispute anything that’s incorrect with the respective credit bureau.
Another way to improve your credit score is to pay your bills on time and to pay down or pay off existing debt. Both will let you lower your debt-to-income ratio, which is a key factor in determining your score. Another tip is to avoid applying for new credit cards, which could decrease your score each time because a “hard” inquiry on your credit typically drops your score by a few points.
Other factors that comprise your credit score are payment history, credit utilization, length of credit history, new credit and credit mix, according to Bankrate.com. Once you have improved your credit score, shop around with several lenders to find the best rate available to you.
How Travis Credit Union Can Help You
Travis Credit Union offers competitive vehicle loans that make it easy for you to buy or refinance a car or truck. Our loans offer interest rate discounts for qualifying members, loan payment deferrals on the first 90 days and the ability to pre-qualify before you shop so you can stay within your budget. We have vehicle insurance products, too.
TCU also has financial wellness tools, such as Experian Boost, which can help increase your credit score instantly, so you will have a better rate when you apply. Plus, you can check your offers to see if you are pre-qualified for a loan. Discover all that you can do with TCU at traviscu.org.