If you’ve conducting a search for a new car, you should take a moment to first check out the loans available to help you decide whether a used car wouldn’t be better for you. Although there’s a trade-off, you want to understand the differences before committing to any particular make and model.

In general, the current auto loan rates used car could get you from any lender are higher than those offered for buying a brand new vehicle. The reasons for this are varied, and revolve around the concept of risk, as you shall see below.

Loan Rates are Predicated on Risk

New cars almost always have lower interest rates than used cars. One of the reasons for this is simply a response to the market: prime borrowers (people with excellent credit scores) tend to go for new cars, which means that the lenders can all but guarantee they will receive on-time payments for the duration of the loan. As a result, they want to attract such people, and lowering interest rates on new cars accomplishes this.

In essence, since interest rates represent payment for the use of a loan – i.e, the lender is allowing you to use his money and thus being compensated for it – and “extra” interest rate reflects the risk he’s taking to let you use it, trustworthy people do not raise his risk and so the rate is small. Let’s take Capital One auto loan rate schedule fee as an example:

  • For a new car, if you secure a loan term of 36 months, 48 months, 60 months, 66 months or 72 months, then the interest rate as of April 2017 is 2.49%.  Usually, if you want a longer payment term, such as 66 or 72 months, the rate increases; however, not so here because dealers incentivize prime borrowers.
  • For a used car, loan terms of 36 months, 48 months or 60 terms have an interest rate of 2.89%. For terms lasting as long as 66 months and 72 months, the rate jumps to 3.39%

As you can see, auto lenders make you pay dearly for having subprime creditworthiness. However, you can influence what you get by taking some measured steps before you go out there looking to sign up.

Improve Your Credit History

Knowing the Auto Loan Rates for Cars

Your credit score can increase in as little as a couple of months if you’re taking an active role in doing so. By paying your bills on time and minimizing your credit usage ratio, your score could go from subprime to near-prime as you prepare to purchase your vehicle.

You can obtain copies of your credit report once yearly from the three primary credit bureaus – Equifax, Experian and TransUnion. This enables you to find errors and fix them, which could raise your credit score. Just as importantly, it also arms you with the knowledge you’ll need to know whether or not a lender is offering you the best terms – commensurate with your FICO score.

Although the latter isn’t precisely the score that the lender will use in making a determination of your creditworthiness, it is very close to it. And remember – even if you have bad credit and have to suffer the higher interest rates on a used car, there’s always the possibility that you can refinance down the line and take advantage of your improving credit history.