Looking for a car loan might sometimes feel like an endless search. With so many options, it can be difficult to narrow down what the best option is for you.
One major aspect to consider is the APR, and finding a good APR can be the key to finding the right car loan. Having a short loan with the lowest APR you can find typically comes with the best financial benefits. You can pay the loan off quickly and accumulate less interest, which will cost you less money overall.
What is APR, anyway?
APR is the Annual Percentage Rate on a loan. It includes the interest rate and any other fees you pay to finance a car each year. The interest rate does not include the fees charged for the loan, but the APR does, making it a measure that encompasses the total cost of borrowing money each year.
When looking at the cost to borrow money, it is key to consider not just the nominal interest rate, but the APR. APR can include closing costs, discounts, broker fees, account fees, etc. This helps you to compare two loans accurately.
What kind of APR can I get?
The APR that is available to you depends on several factors, but most importantly – your credit score. If you have a very high credit score, your interest rates will be lower, thus you will get a lower APR.
If you have a low credit score (think 500), you may only be able to get approved for loans with an interest rate of as high as 15-18%, meaning that the overall APR you can access is much higher.
The other thing that significantly impacts the APR you can access is the type of vehicle you are purchasing.
If you are purchasing a used car, the APR is typically going to be higher than that of a new car. This is because used cars are seen as more of a liability to lenders, with a higher likelihood to have issues that may render the car unusable, resulting in you having to default on the loan. This is something to consider when deciding to purchase a new versus used vehicle with a loan.
What is a good APR for a car loan with my credit score and desired vehicle?
U.S. News released a report in January 2020 with some statistics on the average auto loan rates for each credit category
If you have excellent credit (750 or higher), the average auto loan rates are 5.07% for a new car and 5.32% for a used car.
If you have good credit (700-749), the average auto loan rates are 6.02% for a new car and 6.27% for a used car.
If you have fair credit (600-699), the average auto loan rates are 11.40% for a new car and 11.65% for a used car.
If you have bad credit (451-599), the average auto loan rates are 16.46% for a new car and 16.71% for a used car.
As you can tell, APR varies greatly based on your credit score. Thus, it is a good idea to start thinking about your credit before you will have to purchase a vehicle. Building up your credit with a credit card, or by paying your monthly bills on time can mean that you can save up to 10% on your auto loan APR.
How do I get the best APR for me?
The best way to access optimal APR and loan terms is to shop around. Checking out your options and finding out what you can get approved for with different lenders will give you bargaining power and ensure that you are getting the best deal you can.
If you talk to multiple lenders, you can get a sense of the typical APR for car purchasers in a similar financial and credit situation as you. Loans are offered by local banks and credit unions, private lending companies, and sometimes directly at car dealerships (although it’s often better to shop for loans before you head to the car dealership to avoid being sold a car you can’t afford).
Use a car loan calculator to compare the different loan offers you have on the table. It’s important to consider not only how much you are paying per month, but how much you will pay over the life of the whole loan. Small monthly payments can seem attractive, but longer loan terms may mean you end up paying more interest in the long-term.
Where do I start?
Now that you know how your credit score and the type of vehicle you are purchasing can affect your loan conditions and APR, it’s a good idea to start looking around.
Local lenders strive to give members the lowest rates possible. At Baton Rouge Telco, we offer some of the most competitive loan rates around. We welcome you to search through our options and learn more about the features and benefits of our auto loans.