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How High is ”Too High” for a Used Car Loan Interest Rate?

There are many factors that a lender considers when setting the interest rate that will be offered on a car loan. The only true way to know if you are being offered a rate that is ”too high” is to shop your loan around.

The Factors

Lenders consider a wide variety of factors before determining whether or not to offer a loan. If the loan is approved, those same factors are used to determine what interest rate will be offered. Those factors include, but may not be limited to:

  • Loan to value (LTV):  must be less than 115 percent.
  • Age of vehicle:  preferably seven years old or newer.
  • Miles on vehicle:  under 100K.
  • Down payment:  tied directly to credit score, but best to offer at least ten percent. The more the better.
  • Time on job:  at least two years within the same industry or field.
  • Time at residence:  one year or more.
  • Monthly income before taxes:  at least $1,450.
  • Auto-enhanced credit score:  score approved depends on lender.
  • Debt to income ratio, which will include new payment:  must be less than 40 percent.

In addition to the factors above a lender will look at the length of the loan that you are requesting. Ideally, a lender wants you to finance the money for at least three years so that they can make a profit. If you want a shorter term loan, the lender will barely make enough money to warrant offering the loan. To counteract that, many lenders will require a higher interest rate on shorter term loans. So, if everything looks good for a loan, but you want it for 24 months, you may be required to pay 15 percent interest, but only 10 percent if you extend the loan to 36 months.

What Rate Do You Deserve?

It is fairly easy to find average auto loan rates at various places on the web. However, averages are not very useful if you want to know what rate you truly deserve. You need to see averages based on specific credit score ranges, as well as the type of loan and location. Fortunately, you can look up these specific numbers through Fair Isaac’s (FICO’s) official site:  This calculator enables you to select your state from a dropdown, as well as the type of loan, then serves up average interest rates based on six different credit tiers. This should enable you to tell whether the car loan interest rate being offered to you is too high or not.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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