Your credit standing plays a role in nearly every part of applying for a car loan, but it has the biggest impact on your interest rate. With a bad credit score you could wind up paying a lot more on your car loan.

How does credit score affect interest rate?

Interest is what lenders charge customers for borrowing money. It’s expressed as a percentage rate and is largely dependent on your credit score, since that is what determines your trustworthiness as a borrower.

People with high credit scores have a proven track record of good credit behaviour and repayment and are charged less in interest as a result. Those with poor credit scores are seen as riskier borrowers and are charged more to make up for lost profits should they default on their car loan.

Try out Birchwood Credit Solutions’ Car Loan Calculator to see how a poor, average and good credit score affects your projected monthly loan payments.

Average interest rated by credit score

According to data from FICO — the company that created the credit score model used by Equifax and TransUnion — the average interest rate for someone with an excellent credit score, anything higher than 780, is around 4.5%.

For those with a bad credit score, below 620, interest rates rise substantially. Subprime borrowers can sometimes end up paying three to four times as much in interest as those with good credit.

The table below is based on FICO’s interest rate calculations for a 48-month loan for a new car. Keep in mind that these numbers are averages based on estimates and may not reflect the actual interest rate you will be approved for.

How does loan term affect interest rate?

The longer your loan term, the higher your interest rate will usually be. Car loans payment plans can range from 24 to 84 months and longer loan terms are becoming more popular.

Most people sign up for long loan terms because the lower monthly payments are appealing, but you will inevitably pay more in interest because of the added months. Not only that, but the actual interest rate you pay will be higher because long loans are a greater risk for the lender.

Are interest rates different for new and used vehicles?

Yes, interest rates are usually higher for used car loans because older vehicles are less reliable than new models and have a lower resale value.

Based on the FICO data we used above, the interest rate for a used car with a 48-month term jumps to 5.27% for someone with excellent credit and 18.27% for someone with bad credit.

Do interest rates differ by lender?

Generally speaking, dealerships offer lower car loan interest rates than banks. This is because dealerships have less regulations and are more interested in meeting a customer’s needs in order to make a sale.

How to get a good interest rate on a bad credit car deal

What you pay in interest on a car loan is determined by your credit score. The average interest rate for someone with great credit is 4.5%, but subprime borrowers can usually only access interest rates that are exponentially higher.

If you have bad credit you should apply for a car loan with a shorter term and get car financing straight from the dealership to access a competitive interest rate.

It’s important to do your research before you start your car search. Read on to learn why rates matter, how rates vary by lender, what factors can influence your rate and how you can improve your odds on getting the best car loan interest rates. 

Birchwood Credit Solutions offers in-house financing for any kind of credit situation. Our Finance Managers will work with you to find an interest rate and a car loan that fits your budget and your credit score. Fill out an online application today or stop by one of our three Winnipeg locations.