Put simply, interest is the cost of borrowing money. Consumer loan interest rates are based on the Prime Rate, which is based on the Federal Rate (the percent the federal reserve charges banks). Lenders, in turn, primarily base your interest rate on your credit score, making your loan as individual as you are.

How Your Credit Impacts Interest Rates on Car Loans

The average new car interest rate is nearing six percent. This doesn’t mean everyone enjoys rates this low, however. In fact, if you have bad credit, you’re not likely to find a low interest auto loan. With poor credit, your interest rate could be as much as five to 10 times higher than the average consumer. Opting to keep your credit out of the equation by going to a buy here pay here lot for a car loan could increase your interest rates even more.

Your credit score impacts interest rates because lenders use it as a gauge of risk. Therefore, the better your credit, the lower your interest rate is likely to be. When you’re struggling with credit issues, lenders charge a higher interest rate on an auto loan to help offset increased risk.

Auto Loan Interest Rates on the Rise

When the prime rate is low, people pay less to borrow money. Because your credit impacts interest rates on top of the prime rate, rising interest rates create a ripple effect throughout the lending market. As the average interest rates rise, the rates for borrowers with bad credit get even higher.

After the recession struck in 2009, the US spent six years from June of 2009 to November of 2015 enjoying low interest rates of 3.25 percent. These lower rates were a boon to car buyers and the economy, but they’re now on the rise.

According to Edmunds, the average annual percentage rate (APR) for new car loans rose to 5.75 percent in May of this year – almost a full point higher than in May of 2017, the highest they’ve been since 2009. Despite the fact that this spike in interest rates is driving auto sales, Jeremy Acevedo, Edmunds manager of industry analysis, feels this sales pull-ahead may only be temporary.

“Higher interest rates appear to be incentivizing car shoppers, which is likely why we’ve seen stronger than expected sales so far this year,” said Acevedo. “Since interest rates have been creeping up all year, shoppers are likely thinking it’s better to buy now before rates get any higher.”

Finding the Best Interest Rate for You

Just because you’re not likely to find a low interest auto loan for bad credit doesn’t mean you can’t find the best interest rate for your situation. A great way to estimate a monthly payment without killing your credit score can be to use online tools such as our Car Loan Estimator and Auto Loan Monthly Payment Calculator to figure out your budget.

Another way to offset the costs of a higher interest rate is to prepare the largest down payment you possibly can. Having a substantial down payment decreases the amount you have to borrow, which saves you money in interest charges over the term of your loan. If your down payment is big enough, a lender may even be willing to offer you a loan with a lower interest rate.

The Bottom Line

Everyone’s interest rates are unique when they finance a vehicle. But because the rate these are based on rises and falls, so do average interest rates. With averages on the rise, car loan interest rates for bad credit are likely to increase as well. So, now is a great time to shop for your next vehicle – before interest rates go higher.

If you’re wondering where to start the process of getting auto financing for your next car, look no further. At Auto Credit Express, we want to help ease the stress of searching for you next car by matching you with a local dealer. We work with special finance dealers all across America that have lenders available to assist people no matter their credit situation. Get started right now by filling out or fast and free auto loan request form online.