The average US auto loan interest rate in the second quarter of 2018 was 9.40 percent for used cars and 5.76 percent for new vehicles, according to the credit bureau Experian. Since different factors affect your interest rate, it’s important to know what goes into determining it and how you might be able to get a better rate in the future.

4 Things that Influence Interest Rates

In order to determine your interest rate, a lender looks at many different factors. Here are four things they use:

  1. What Do Auto Lenders Base Interest Rates On?Credit score – Your credit score is the most important factor that determines what you qualify for. The higher your credit score, the lower the rate you typically are offered. For this reason, it's a good idea to check your credit score and credit reports before taking out an auto loan. There are many ways to check your credit score, including getting it directly from any of the three major credit bureaus for a fee. Your credit reports can be accessed through, where you can request a complimentary copy from each of the three bureaus once every 12 months. Double check that everything is accurate, and dispute any negative marks that aren't.
  2. Income – When determining which loan program you qualify for, lenders look at your debt to income (DTI) ratio. Your DTI is calculated by adding up all of your monthly bills and dividing that by your pre-tax monthly income. In many cases, the lower the DTI ratio, the lower your interest rate.
  3. Loan length – The loan term you pick can influence your interest rate. Generally, lenders offer higher rates on longer loans than shorter ones. The shorter the loan term, the quicker you can pay off the loan and the lower your interest charges are. The downside to a shorter loan term is a higher monthly payment.
  4. Vehicle’s age – Used cars are generally the best option for subprime consumers. Although used vehicles are generally cheaper, the bad news is that they typically come with higher interest rates than new cars. This doesn’t mean you can’t get a good deal. You just need to be prepared if the interest rate is higher than you thought it'd be.

The Bottom Line

When dealing with subprime auto loans, you can expect your interest rate to be higher than average. However, you can use the car loan to help improve your credit for good by making all of your payments on time. Plus, you may be able to refinance for a better rate once you've improved your credit score.

If you’re dealing with credit issues and need an auto loan, Drivers Lane is here to help. We want to connect you to a local dealership that specializes in helping people with imperfect credit. Get started today by completing our easy and secure online auto loan request form.