Auto loans help prospective car buyers achieve their dreams of owning a vehicle. In 2023, auto loan rates have consistently risen and are expected to see a similar trend in 2024.
As interest rates continue to rise, it’s essential to determine your budget and compare multiple lenders before committing to a loan. You also can acquire better rates by improving your credit profile.
Auto Loan Details
Before you take out an auto loan, consider the key factors that determine your ability to repay the loan.
Interest Rates
Interest rates determine the cost of borrowing money from your lender. Auto loan rates typically start around 4% to 8%, depending on your lender. The rate you receive is determined by several factors, including:
- Credit history. Most lenders require a credit score of at least 620 to qualify for an auto loan. Higher scores typically result in more favorable terms.
- Down payment. Down payments are not required, but they are typically recommended. A down payment of at least 20% is recommended for new cars while only 10% is suggested for older vehicles. Larger down payments typically result in lower rates and lower monthly payments.
- Vehicle age. Newer vehicles generally have lower interest rates because they’re more valuable and in better condition. Conversely, older vehicles have higher interest rates due to their depreciated value.
Fees
Fees can accumulate over time and affect the overall cost of your loan. Before you proceed with a loan, make sure you understand all of the potential fees that may appear, including:
- Origination fees. Origination fees cover the processing required to acquire financing for your vehicle. They’re typically 1% and 2% of the loan amount and are deducted upfront before the lender disburses your loan.
- Late payment fees. If you’re unable to make your monthly payment by its due date, most lenders charge a late payment fee. Most late fees range from $25 to $50.
- Prepayment penalties. Some lenders charge a prepayment penalty for repaying your loan early. Most prepayment penalties are around 2% of your remaining loan balance but can vary based on your lender.
- Registration fees. When you take out an auto loan, the lender may charge you a fee to register your vehicle with the state on your behalf. This fee varies by state and lender.
Loan Amounts
Your loan amount refers to the principal amount the lender offers you. Your loan amount can vary depending on your lender, credit score and the vehicle’s price. However, most lenders typically offer $500 to $500,000.
Repayment Terms
Your repayment period refers to how long you have to repay your loan and interest. Auto loan repayment terms can range from three to eight years, depending on your lender. Shorter terms result in larger monthly payments but less interest overall. If you want lower monthly payments, choose a longer repayment period. However, longer terms come with more interest charges.
Auto Loan Interest Rates Through 2023
Auto loan interest rates have risen in 2023 due to a fluctuating economy. In January, the average rate was 6.18%. That rate increased to 7.51% by the end of the third quarter. Understanding your needs and comparing multiple lenders can help you avoid high interest rates.
Rates Are High Going Into 2024
Auto loan interest rates are directly affected by the federal funds rate—which guides overnight lending among U.S. banks—set by the government. The government typically raises the federal funds rate to compensate for inflation by increasing short-term borrowing costs. As a result, credit supply dwindles, causing loan interest rates to skyrocket.
Rates are likely going stay inflated going into 2024, so financing will be expensive for most borrowers. This makes it more crucial to improve your creditworthiness to qualify for the best rates available.
How To Qualify for the Lowest Possible Rates
To qualify for lower interest rates and favorable terms, evaluate your financial situation and follow these steps before applying for an auto loan:
- Raise your credit score. Your credit score reflects your ability to manage monthly payments. With a higher score, such as one of at least 670, you’ll be eligible for lower interest rates. If your score is below 670, you can improve it by paying off any outstanding debt and reducing your credit utilization.
- Prequalify with multiple lenders. When you prequalify with a lender, you can see what terms you may qualify for without impacting your credit score. Considering multiple lenders allows you to identify your best options before formally applying.
- Increase your down payment. Most lenders recommend a down payment of at least 20% before taking out a loan. A larger down payment poses less risk to the lender, allowing them to offer you a lower interest rate.
- Add a co-signer. If your credit isn’t strong enough to qualify for a loan, adding a co-signer can help you access rates that would otherwise be out of reach. A co-signer uses their credit score to help you qualify. However, the co-signer assumes equal responsibility if you fail to repay your loan, so establish an understanding with your co-signer before proceeding.
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