Article originally published July 13th, 2016. Updated October 30th, 2018.
More people are opting to lease their new set of wheels instead of purchasing them, according to Q2 2018 data from Experian.
The number of auto loans grew to an all-time high, with leasing surpassed 30% of all new consumer vehicle sales. But the interest rates consumers are getting on these loans has stayed low, especially for used cars. In fact, Experian reported that average loan rates saw some increases, but still remain historically low.
Loan rates for a new car in Q2 of 2018 were 5.76%, up from 5.20% a year prior. Franchise used rates are 8.28% (down from 7.88% in Q2 2017), while independently used rates are 11.87% (down only 0.17% from Q2 2018).
The Experian Automotive scoring deems prime consumers as those with scores of 661 to 850, nonprime users with scores of 601 to 660, and subprime users as those with scores of 300 to 600. Consumers on all risk tiers are increasingly choosing to lease over purchasing cars, according to the report.
The number of prime consumers choosing used vehicles increased from 55.61% in Q2 2016 to 55.79% in Q2 2018. The number of nonprime and subprime consumers also saw increases, from 21.75% to 22.05% and decreases of 25.71% to 25.05%, respectively.
Experian reported that the increased number of prime consumers choosing used vehicles resulted in “score increases, greater percentages of used financing in the prime risk tier and lower average used rates.”
Getting a Car Loan
If you’re thinking about buying a used car and taking out an auto loan to do it, it’s a good idea to review your credit first. Having a good credit score can help you qualify for better terms and conditions on your financing. (To find out where your credit stands, you can see two of your credit scores for free, updated every 14 days, on Credit.com.)
And when you’re figuring out how much you can afford, remember to consider not only how much your monthly car payment will be but also how much the loan will cost you in the end, by considering the interest rate and length of the loan term. (The longer the loan term, the more interest you will pay.)
If you aren’t happy with what you see, don’t worry — you may be able to improve your credit scores by paying down any big credit card balances, disputing errors and limiting credit inquiries until your score has had time to rebound.
Gather All Documentation
When attempting to get a used car loan, you will want to gather all the necessary documentation including the following:
- Your Driver’s License
- Proof of all of your income- this can be a paycheck stub or even a tax return
- A utility or phone bill to prove your residency
- Your social security number so they can run your credit check
These days, you can often apply for the used car loan right online or even by phone which makes it the process that much easier and accessible.
Start With Your Own Banking Institution
It is always a good idea to start with your own bank or credit union for financing because you have already established history and relationship with them. Typically, you will be able to find the absolute best rates and more favorable terms if you go through your own bank.
They will also be able to advise you on all the options that are available to you as you begin the journey toward car ownership.
Shop for the Best Rates
You never want to settle on the first rate you are given; don’t be afraid to shop around to see if you can find something better than the typical auto loan rates. You will find the best auto loan rates if you have good credit. Additionally, if you apply for multiple loans within a 14 day period, it will only count as one hard inquiry so that you can find the best rate possible.
What is the Average Used Car Loan Rate?
Typically, you will find that the car loan rate on a used car is going to be a bit higher than the rates you would find with a newer car. For example, good credit car loans can see an interest rate as low as 3.9% for a newer model and a little more than 5% for its older version.
Average Auto Loan Rates by Credit Score
The following are the average rates you may find for a used car loan that carries a 60-month repayment term based on a range of different FICO Scores.
With a credit score between 500 and 589, you may be looking at interest rates on the loan as high as 16%. A bad credit score also makes it a lot harder to get approved for the car loan initially as well.
A credit score in between 590 and 619 will typically see the 15% mark, and the percentages get lower from here with the lowest coming in at 4.39% with a credit score between a 720 and 850.
A longer loan term will usually mean you will have a lower monthly payment, but you will also accrue more in interest with a longer loan term.
When determining the average used car loan rate and the amount of interest you may have to pay on a loan, you will want to check all three of your credit reports, examine your credit score and credit history and determine what steps you can take to improve your credit, so you can qualify for a lower interest rate.
Again, if you bank with a credit union, always start there first because the lender will already be able to see if you are high risk or not. Car buyers should always take their time, do their research, and tackle the work of fixing their credit prior to obtaining a loan for a car. It is always best to shop smarter and save money in the long run.