The Impact of Bad Credit on Your Car Loan Interest Rates
Posted Tuesday, Feb 04, 2025
Your credit score significantly affects your ability to finance major purchases such as buying a car. The credit scoring system is used to assess an applicant’s risk and predict their ability to repay their debts.
Generally, the more credit you have, such as loans or credit card debt, the lower your credit score will be, at least if you have a history of not paying it. Car finance interest rates for bad credit are generally higher because lenders want to protect themselves from the risk of lending loans to people with a history of late payments.
In this article, we’ll explore how your credit score can impact your interest rates and how to secure the best interest rates possible in your situation.
What is Bad Credit in Car Loan?
Most people who have ever borrowed loans or signed up for credit cards will have a credit history recorded at one or more of three main credit bureaus: Equifax, Experian, and TransUnion. This credit history contains information about their debts and bill payment history to calculate their credit score, a numerical indicator that acts as a guide to their creditworthiness.
The most common credit score in the United States is the FICO Score, originally (Fair, Isaac and Company), and VantageScore. In both scoring models, a credit score below a certain threshold indicates poor credit. For FICO, a score below 580 is considered bad, while for VantageScore, a score below 601 falls into the poor or very poor credit categories.
Relevant or Relatable post: Understanding Bad Credit Car Loans
Importance of Credit Score in Loan Approval
As already discussed, when you apply for an auto loan, lenders look at your credit history to understand your past financial behavior. If your credit history is very short or nonexistent, lenders may have very little to offer you.
Lenders also look at the amount of debt you currently have, and if you have a substantial amount of debt, they may be hesitant to offer you more credit. However, a solid payment history and not owing much money can allow you to borrow more money at lower interest rates.
It will show lenders that you are responsible for managing your debts and have a track record of making timely payments, among other factors. Both scoring models, FICO and VantageScore, consider elements such as credit utilization, payment history, and the length of your accounts, helping lenders see your financial stability over the past few years.
Understanding Credit Score Ranges and Interest Rates
Here’s the breakdown of typical credit score ranges and how they might affect interest rates.
| Credit Score Range | Description | Interest Rates |
| 800-850 | Exceptional | Lower interest rates as lenders view you as a very reliable borrower. |
| 740-799 | Very Good | You’ll qualify for most loan options and get very competitive interest rates. |
| 670-739 | Good | Favorable interest rates, and considered a reliable borrower by many lenders. |
| 580-669 | Fair | Lenders may view you as a riskier borrower and offer higher interest rates. |
| Below 580 | Poor | May have difficulty in getting loans, might receive very high interest rates if approved. |
Impact of Bad Credit on Car Loan Interest Rates
Lenders use risk-based pricing to decide on the interest rates they will offer borrowers. Your credit score and credit report provide lenders with information about how you have managed credit in the past, which is also viewed as a way to predict your future financial behavior.
When someone has poor credit, it might be because they have missed or made late payments, high amounts of debt, or have negative marks such as bankruptcy or accounts in collections. It could also simply mean that the borrower is new to credit and hasn't yet built a positive credit history yet.
While lenders have some options when a borrower can't pay, they may ultimately be required to sell the debt to a collection agency for a fraction of its value or write off the debt entirely.
To protect themselves from such potential losses, lenders usually charge higher interest rates on borrowers with lower credit scores.
Factors Influencing Interest Rates Beyond Credit Score
Loan interest rates are influenced by various factors beyond just the credit score. Here are some additional factors that can impact interest rates:
1. Loan Terms: The loan term length can affect the interest rate. Generally, longer-term loans may have higher interest rates compared to shorter-term loans.
2. Down Payment: In general, a larger down payment means a lower interest rate because lenders see a lower level of risk when you have more stake in the vehicle.
3. Loan Amount: Car buyers can pay higher interest rates on loans that are particularly large, while smaller loan amounts may result in lower interest rates.
4. Income and Debt to Income Ratio: Lenders consider your income level and debt-to-income ratio (DTI) to assess your ability to repay the loan. Lower DTI ratios and higher income levels may lead to more favorable interest rates.
5. Market Conditions: Interest rates can fluctuate based on prevailing market conditions, such as changes in the economy, inflation rates, and central bank policies.
6. Lender Policies: Each lender may have its own policies and guidelines that influence the interest rates they offer. It's a good idea to compare rates from different lenders to find the most competitive option.
How To Secure Better Interest Rates
Securing a good interest rate with bad credit can be challenging, but there are definitely some steps you can take to improve your chances. Here are some strategies:
Increase Your Credit Score
When applying for a car loan, having a higher credit score makes you appear less risky to lenders. You demonstrate responsible financial behavior by consistently paying your bills on time and avoiding excessive credit use. Lenders are more likely to offer you a low interest rate closer to the advertised rates because they don't need to adjust for a low credit score. Building a strong credit score takes time, but it's never too early to build a healthy credit history.
Improve Your Debt-to-Income Ratio
Your debt-to-income ratio is calculated by dividing your total monthly debts by your household's gross income, which refers to your income before taxes. You can find your DTI percentage by multiplying this result by 100. A lower DTI shows a higher portion of your income can cover your debt payments, making you a more attractive borrower.
Make a Higher Down Payment
The amount of your down payment on your car loan directly influences the interest rate set by your lender. If you offer a larger down payment, you may be eligible for a lower interest rate.
Maintaining Employment Status
Auto loan lenders understand that not everyone has a consistent employment history from the moment they start working. However, they also understand that stable employment is a positive sign that a borrower is likely to repay their loan. In general, lenders prefer to see a minimum of two years of consistent employment history.
Consider a Shorter Loan Term
When you have longer loan terms, you end up paying more interest. Shorter-term loans generally have lower interest costs but higher monthly payments compared to longer-term loans. If you can afford to make higher monthly payments, it may be worth the interest savings from a lower rate.
Your credit score ultimately dictates your chances of getting a car loan. While there is no single number that sets an example for a bad credit score, anything below the mid-600s can lower your chances of getting a car loan from the bank.
While the chances of getting an approved auto loan may be slim, borrowers with bad credit scores get auto loans every day. However, there may be additional factors like bigger down payments, high interest rates, or choosing a less expensive car. In this blog, we’ll cover the average interest rates on auto car loans with poor credit scores so you can make an informed choice.
Know Your Bad Credit Score
Before looking up the average interest rates on auto car loans with poor credit, you should primarily know where your credit score stands. FICO and VantageScore are the two most common credit score models used to evaluate interest rates for car loans. Some auto lenders generally use an industry-specific FICO model which ranges from 250 to 900, meaning the higher the number, the lower your interest rate will be.
To determine your average interest rates on your auto car loan, compare your bad credit score against industry averages to gain an estimate. This way you can avoid surprises and know what to expect before heading over to the lender, so you can avoid your chances of a high-risk auto loan.
Average Interest Rates for Car Loans with Bad Credit
Lenders base interest rates on multiple factors, such as whether you’re investing in a new or used car, the state market price, and the length of the loan- however your credit score is the ultimate defining factor. Ultimately, your credit score will determine the average interest rate on your auto loan.
Experian released a State of the Automotive Finance Market Report from the second quarter of 2024, that gave a brief overview of the average interest rates for both new and used car auto loans.
Average Interest Rates by Credit Score Range
| Credit Score Range | New Car | Used car |
| Superprime (781-850) |
5.25% | 7.13% |
| Prime (661-780) |
6.87% | 9.36% |
| Near Prime (601-660) |
9.83% | 13.92% |
| Subprime (501-600) |
13.18% | 18.86% |
| Deep subprime (300-500) |
15.77% | 21.55% |
Looking at the graph above, it’s safe to say that your credit score greatly impacts the average interest rate you qualify for when securing financing for your car.
The Cost You’ll Pay For Your Bad Credit
Eventually, it all narrows down to the amount of the monthly installments you’ll be paying and whether it falls within your budget. Let's take the chart below as an example to gain a better understanding of what your average interest rate on your car loan will be, especially if you have bad credit.
| Monthly Payment | Interest Paid | Total Cost | |
| 7.13% Interest Rate | $278.08 | $2,685 | $16,685 |
| 9.36% Interest Rate | $293.07 | $3,584 | $17,584 |
| 13.92% Interest Rate | $325.18 | $5,511 | $19,511 |
| 18.86% Interest Rate | $362.09 | $7,725 | $21,725 |
| 21.55% Interest Rate | $383.09 | $8,985 | $22,985 |
You can see the impact your bad credit score has on the average interest rate for a car auto loan. As your score drops, your interest rate increases, and the total cost of your loan increases dramatically. Usually, twice the usual amount you’ll be paying for the car- such auto loans are referred to as high-risk auto loans. So, it's important to understand how the math works before you sign any documentation.
How To Secure Your Bad Credit Auto Loan
Now that you’ve assessed the factors on how your bad credit can impact the average interest rate on your car loan, we can move on to where to secure auto loans. Although you might face some difficulty from your local bank, you can always qualify for an auto loan from alternative lenders. Let’s take a closer look:
Online lenders: Modern times have introduced the concept of online lenders that will offer preapproved loans depending on the kind of vehicle you want to purchase. This allows you to see the potential rates before you sign any official documentation.
Bank & Credit Unions: If you have a good relationship with your local bank then your chances of securing an average interest rate auto car loan despite poor credit have gone higher. If you have successfully secured financing then make sure to make on-time monthly payments to improve your credit score as you pay for your new car.
Buy Here Pay Here Car Dealerships: Designed for car buyers with poor credit, Buy Here Pay Here car dealerships offer the convenience of a one-stop shop for buying and financing your car. Some used car dealerships conduct no-credit checks to evaluate the average interest rate on your car loan regardless of your poor credit. We advise visiting your local car dealership to know the details of how in-house financing works.
Tips for Car Buyers with Bad Credit Scores
Despite what the myths say, it’s not impossible to get a pre-approved car loan despite having bad credit. However, it’s common knowledge, that if you have a less-than-perfect credit score, the interest rate is bound to increase.
Here are some tips to help you make an informed decision on your bad credit auto loan:
Improve your credit score: If a new car is on the books for you in the near future, work on improving your credit score. Any change to your credit score can help you qualify for lower interest rates, which can help you save money in the long run. Pay your bills on time along with your credit card balances to keep them low and to help establish a strong payment history.
Choose An Affordable Car: While a new car may attract interested car buyers, it’s important to look at vehicles that maintain your budget. Look around your local used car dealerships which may offer CPO vehicles that offer the same benefits as a new car. Remember to buy a car which can help you improve your credit score.
Choose The Shortest Term Possible: Signing an auto loan that extends for a long time increases the interest rate, which is a bad idea if you have poor credit. However, it’s important to keep the total cost of financing in mind, to make sure your monthly payment fits within your budget
Make A Down Payment: With the help of a down payment, you can save up cash and access lower interest rates depending on the amount. If you have a poor credit score history, begin saving up so you can fulfill the down payment requirement to avoid high-risk auto loans that further damage your credit.
Understand How Buy Here Pay Here Works: If you’re looking into in-house financing, it’s important to know the functioning of Buy Here Pay Here dealerships. Some BHPH used car dealerships provide high interest rates for car loans due to your bad credit history. Visit your local Buy Here Pay Here car dealership to gain an estimate of the interest rates depending on the vehicle you choose.
It’s important to know all the details and build a monthly estimate to finance your bad credit auto loan, where your average interest rate typically reaches double digits if your credit score falls around 600 or below. By improving your credit score with the help of these tips, you can secure a reliable auto loan that doesn't incur any potential damage.
Don't Let Bad Credit Stop You From Getting Your Dream Ride
Your credit score can damper your spirits, however, remember that you can still secure an auto loan despite your bad credit score. At Honest Autos, we help bad credit buyers by providing Buy Here Pay Here at our used car dealership to make purchasing their new used car easier. Our dealers will work with you and provide an average interest rate on your auto loan despite your bad credit score. Visit our local used car Buy Here Pay Here dealership in Fruitland Park, Florida to get your dream ride today!
Conclusion
Rebuilding a bad credit score takes time, but it doesn't mean you'll always be stuck with a high-interest auto loan. Even after securing your auto loan, it's important to keep an eye on your credit and look for ways to build and maintain a positive credit history. Over time, the negative impact on your credit report can lessen, especially if you demonstrate responsible credit behavior moving forward.
As your credit score improves, you might have the opportunity to refinance your auto loan at a lower interest rate. Alternatively, when you're ready to purchase your next car, you may qualify for a more affordable auto loan.
At Honest Autos, we understand the importance of establishing or rebuilding credit. That's why we offer flexible auto financing options to help you achieve your goal. Our financing options are designed to accommodate different credit situations, including those with less-than-perfect credit. Take advantage of our expertise and assistance in finding an auto financing solution that suits your needs.
