key points
- The average interest rate for new and used cars is 8% and 8.5%, respectively.
- Those with a credit score of 700 can get better home loans and credit cards.
- Lower your monthly payments by extending repayment periods, switching to a lease or raising your credit score.
Car loans are still more expensive than they were a year ago. But car owners with “good” credit in the 700 range can expect to get more affordable loans.
FICO, the largest credit scoring company, considers more than 670 “good” scores. If your score is in this range, you’re not alone: The average U.S. FICO® score is around 700. People with good scores get decent rates on car loans.
Average interest rate for good credit
The average interest rate for good credit on new and used cars is about 8% and 8.5%, respectively, according to myFico’s data on interest rates by credit score. (At the beginning of last year, auto rates were much cheaper.)
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Example: Let’s say a customer with a credit score of 700 wants to take out a $35,000 60-month loan. They would pay about $710 a month for a new car. Interest rates on used cars tend to be higher. So the same customer would pay about $864 a month for a used car.
Customers with lower scores can expect to pay more, between $710 and $1,100 per month, on a $35,000 loan. This is why it is essential to have a high credit score. It can help you keep your monthly payments low, and you’ll pay less in the long run.
Other benefits of a 700 credit score
Good credit offers benefits such as mortgage loans and credit card approvals. A credit score of 700 qualifies potential homeowners for lower mortgage interest rates, which equates to cheaper home payments. And drivers may want to combine a fancy new car with a credit card that makes travel more affordable. (The best gas credit cards offer 3% or more cash back at the pump.)
A score of 700 can even lower the cost of car insurance. The best car insurance for good credit offers discounts to drivers with high scores.
How to lower your monthly car payment
Cost too high? Don’t worry: You can lower your monthly premiums by extending your repayment period, switching to a lease or raising your credit score.
You can lower your monthly payments by extending a standard 36-month repayment period to 48 months or more. However, doing so will cost you; you will pay more interest over the life of your loan. But it’s worth considering if you need some margin to cover non-car expenses.
Switching to a lease lowers your monthly payments, but buyers sacrifice car ownership. However, a lease is worth considering if you expect to upgrade to a new vehicle frequently or anticipate having more disposable income when your lease ends.
It takes time increase your credit score, but the juice is worth squeezing. Typical strategies include making monthly payments on time, keeping your monthly balance low, and avoiding opening new credit cards frequently. The best credit scores are in the 800+ range and can offer significant discounts on car loans.
How much can you afford to pay for a car?
The higher your income and the better your loan, the more you can afford to spend. A good rule of thumb is to keep your car payments (including gas and insurance) below 15% of your monthly income (after taxes). The best auto loans offer reasonable rates, saving you thousands in interest fees. Consider the whole financial picture before buying a car to maximize savings.
