Who Determines Your Car Loan Rate?

Car Loan Rate: When you get ready to purchase a new car, you’ll have to decide whether to finance the car or pay cash. If you’re going to finance the car, you’ll also have to decide how much of your monthly budget will go toward your car payment and how much will go toward other expenses. While interest rates are important in any car loan decision, so are the factors that determine your interest rate.

What Factors Determine Your Car Loan Rate?

To determine a car loan rate, you must consider five factors: your lender, credit score, income, down payment amount, loan term, and your vehicle selection. These factors play an important role in determining how much you will pay for a new or used car. So let’s take a closer look at each factor.


Private banks, lending companies, and financial institutions like credit unions work with car dealerships to offer car loans to consumers. The institution will ask you for various information, including your income and credit score. They’ll then either approve or deny your loan. If banks reject you, don’t give up. Instead, apply to multiple lenders to increase the chances of being approved.

Credit Score

To start, your credit score must be high enough to qualify for a loan. For example, if you want to borrow $20,000 at an annual percentage rate (APR) of 3.5% over 60 months, you’ll need a credit score of at least 680 to land that interest rate without additional fees or charges.

Loan Term

The length of time for which you borrow your car. The longer you borrow, the lower your interest rate will be. According to Lantern Credit by SoFi, “Lower monthly payments from a car refinance loan is usually achieved as the result of a loan term, which can mean paying more over the life of the loan, even if the new interest rate is lower. ”

If you can’t afford to pay off your loan before it expires, then a long-term loan could cost more than a short-term one. Short-term loans are better if you think you might want to trade in or sell your vehicle before paying off your loan—you won’t have any outstanding balance left over.

Vehicle Selection

Choosing a vehicle for your car loan will play a significant role in determining your final interest rate. If you have bad credit, don’t expect to walk into a luxury car dealership and drive away with a brand new sports car. Instead, luxury cars require a better credit score to get approved. If you buy an older used vehicle instead, you’ll likely be able to qualify for a lower interest rate and monthly payment.

Down Payment

When you purchase a car, one of your first financial hurdles is to figure out how much money you’ll need to come up with upfront. This sum is called a down payment. It’s also commonly referred to as money down. Many people have heard that they should put 20% or more down on their new vehicle to get a reasonable interest rate from their lender. However, many other factors determine your interest rate and general loan terms.

Most people don’t realize that car dealerships aren’t really in control of interest rates. The more creditworthy you appear, and the more money you have on hand to put down on a vehicle will likely lead to better terms and lower monthly payments.