It’s no secret that bad credit equals higher interest rates when it comes to car loans. Just how much higher depends on many factors. Let’s see what might determine if you can get a low interest auto loan while you’re facing credit challenges.

Average Auto Loan Interest Rates

According to ValuePenguin, the average interest rate in the US was 4.21 percent (on a 60-month loan) in 2017. The average range of interest rates fell between three percent and 10 percent. However, people who have poor credit and are considered “subprime” can see rates five to ten times higher than average.

Value Penguin interest rates

Chart courtesy of ValuePenguin

Higher Interest Rates with Bad Credit

So, can you get a low interest auto loan with bad credit? Unfortunately, the answer is usually no. As a credit-challenged car buyer, you’ll never be able to qualify for the lowest rates, particularly the zero-percent financing deals that are so popular in car commercials. That’s where the small print “subject to lender qualifications” will hurt.

Interest rates are largely based on credit scores, but they also vary by lender, loan term, and the vehicle being financed. Because credit plays such a big part, the further you move toward good credit, the better the interest rate you’ll see. People who fall into the poor credit and subprime ranges could be looking at interest rates of 12, 16, 20 percent, or higher.

However, just because you can’t qualify for the best interest rate, you shouldn’t give up on an auto loan. It just means you have to be smarter about the financing you get.

Budget for Your Best Interest

Once you’ve found a way to get financed, set a budget so you don’t blow all your monthly income on a car payment. A typical subprime lender will cap your debt to income (DTI) ratio at 50 percent. This means all your monthly bills – including car and insurance – can’t be more than half your gross (before taxes) monthly income.

Lenders also want to make sure your car and insurance doesn’t make up too much of that 50 percent, so they look at your payment to income (PTI) ratio as well. PTI is found by dividing your estimated total car and insurance payment by your gross monthly income. Subprime lenders typically cap this at 15 to 20 percent.

Interest accrues daily based on the total amount you owe, so think long term. Stretching out your loan term to make smaller monthly payments only increases how much you’ll pay in interest charges. When you know you’ll end up with a higher interest rate, it’s best to choose a shorter loan term that allows you to pay off your loan quickly.

Extending a loan to 60 months or more will have you paying hundreds or even thousands more in interest charges. Your best bet is to make the largest monthly payment you can afford for the shortest term possible. If it's a simple interest loan, it’ll also help if you pay off your loan early.

Shop ‘Til You Drop Your Interest Rate

To get the best possible interest rate, you’ll have to rate shop. Done properly, rate shopping can be the key to big savings. When making a large purchase such as a car, the credit bureaus allow for a certain amount of shopping without hitting your credit with a hard inquiry each time you apply. There’s a limited time frame on this, so be sure to do it within 14 to 45 days.

In order to make your rate shopping experience effective, you’ll have to know what your credit looks like. The best way to do this is to establish a credit monitoring routine. You’re entitled to one free credit report from each of the three national credit bureaus every 12 months, which you can request at Monitor your credit reports for any mistakes that may raise your score when removed.

You may need to pay a small fee in order to get your credit scores at the same time when you do this, but for rate shopping an interest rate, it’s the score you’ll need. Credit scores can also be obtained from any number of free sources online, such as Discover Card’s Credit Scorecard or Credit Karma.

Keep in mind as you’re rate shopping that you’ll most likely need a subprime lender if your credit score falls below 600. These lenders only work indirectly through special finance dealers. Typically, when you have poor credit, it’s difficult to qualify for a direct financing, and not all dealers are paired up with subprime lenders, so make sure you’re looking in the right place.

Take the First Steps

If you’ve established your budget but are having trouble finding a lender to help you out, let Auto Credit Express guide your way. We work with a nationwide network of special finance dealers and want to help you find one in your area. Simply fill out our online auto loan request form to get started today!