Auto Loans 101: How Your Credit Score Directly Impacts Interest Rates in 2024

Auto Loan


9 min. read

By: FCU Team

Buying a car is a major financial decision requiring careful consideration of various factors, including your credit score. Your credit score plays a crucial role in determining the interest rate you'll receive on an auto loan, which can significantly impact the total cost of ownership over the life of the loan. Understanding the relationship between credit scores and interest rates is essential for making informed decisions and potentially saving thousands of dollars.

In our Auto Loans Process Guide, we discussed the comprehensive journey of auto financing, covering topics such as new versus used car buying, down payments, loan terms, and negotiation strategies. Building upon that foundation, this article delves deeper into the direct impact of credit scores on auto loan interest rates in 2024. Additionally, we'll discuss the potential benefits of refinancing your auto loan to secure a lower interest rate based on an improved credit profile.

What is a Credit Score?

A credit score is a three-digit numerical representation of your creditworthiness, ranging from 300 to 850. It is calculated based on various factors in your credit report, such as payment history, amounts owed, length of credit history, types of credit used, and new credit inquiries. Lenders use your credit score to assess the risk of lending money to you and to determine the interest rate they will offer.

Your credit score is a crucial factor in the lending process, as it helps lenders determine your ability to repay a loan. A higher credit score generally indicates a lower risk of defaulting on a loan, which results in more favorable interest rates and loan terms. Conversely, a lower credit score suggests a higher risk of defaulting, leading to higher interest rates and less desirable loan terms.
There are two primary credit scoring models used in the U.S.: FICO and VantageScore.


FICO is the most widely used credit scoring model, with scores typically ranging from 300 to 850, although some scores can go up to 900. FICO scores are calculated using a proprietary formula taking into account various factors in your credit report, such as payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). A FICO score of 700 or above is generally considered good, while a score below 670 may be considered subprime or poor.


VantageScore is a credit scoring model developed by the three major credit bureaus (Experian, Equifax, and TransUnion) as an alternative to the FICO scoring system. VantageScore also ranges from 300 to 850, but it uses a slightly different formula to calculate scores. While VantageScore is gaining popularity, FICO scores are still the most widely used by lenders. Regardless of the model used, maintaining a good credit score is essential for securing favorable interest rates and loan terms, especially when it comes to auto loans.

The Impact of Credit Scores on Auto Loan Interest Rates

There is a direct correlation between your credit score and the interest rate you'll receive on an auto loan. Lenders use your credit score to determine the level of risk they'll be taking on by lending you money. The higher your credit score, the lower the risk you pose to the lender, and the lower the interest rate they'll offer. Conversely, the lower your credit score, the higher the risk you pose, and the higher the interest rate you can expect. To illustrate this relationship, let's look at some examples of how different credit score ranges can impact 2024 interest rates for auto loans:

Excellent Credit (760-850): Borrowers with excellent credit scores represent the lowest risk to lenders and will qualify for the best interest rates. For a new car loan in 2024, someone with a credit score in this range could expect an annual percentage rate (APR) of around 5-7%.

Good Credit (700-759): Those with good credit scores will still qualify for favorable interest rates, though slightly higher than those with excellent credit. The average APR for this credit tier on a new car loan in 2024 may be around 7-9%.

Fair Credit (640-699): Borrowers with fair credit are considered higher risk, resulting in higher interest rates. The average interest rate range for a new car loan in 2024 with a fair credit score could be 10-14%.

Poor Credit (500-639): Those with poor credit represent the highest risk level and will be charged the highest interest rates. Depending on the exact credit score, annual percentage rates for a new auto loan in 2024 could range from 15-20% or higher.

The difference in interest rates across these credit tiers may seem small percentage-wise, but compounded over the life of a 5-year $25,000 auto loan, it translates to substantial differences in the total interest paid:

Excellent credit (6% APR) = $3,080 in total interest

Good credit (8% APR) = $4,336 in total interest

Fair credit (12% APR) = $6,848 in total interest

Poor credit (18% APR) = $11,224 in total interest

As this example illustrates, your credit score at the time of taking out an auto loan can mean the difference between thousands of dollars in interest costs. With excellent credit, you could save over $8,000 in interest compared to someone with poor credit on the same loan amount and term.

Knowing the impact credit scores have on interest rates, it's crucial to check your credit report and score before shopping for an auto loan. Even small improvements can nudge you into a better credit tier and qualify you for major savings.

Factors Affecting Credit Scores and How to Improve Them

There are several key factors lenders consider when calculating your credit score. Understanding these factors is crucial, as it empowers you to take control of your credit health and improve your score over time.

Payment History (35%): This is the most significant factor influencing your credit score. Making on-time payments on all your credit accounts, such as credit cards, loans, and mortgages, is essential for maintaining a good credit score.

Credit Utilization (30%): This refers to the amount of available credit you're using. Ideally, you should aim to keep your credit card balances below 30% of your total credit limit to maintain a favorable credit utilization ratio.

Credit Mix (10%): Lenders prefer to see a diverse mix of credit types, such as revolving credit (credit cards) and installment loans (auto loans, personal loans, etc.). Having a balanced credit mix can positively impact your score.

Credit Age (15%): The length of your credit history also plays a role. Generally, the longer your credit accounts have been open, the better it is for your score.

To improve your credit score and qualify for lower auto loan interest rates, follow these practical strategies:

Pay all bills on time: Set up automatic payments or reminders to ensure you never miss a due date.

Keep credit card balances low: Aim to keep your credit utilization below 30% by paying down balances or requesting credit limit increases.

Dispute errors on credit reports: Regularly review your credit reports and dispute any inaccuracies with the credit bureaus.

Become an authorized user: Ask a family member with good credit to add you as an authorized user on their credit card account, allowing you to benefit from their positive payment history.

Monitor your credit reports: Check your credit reports regularly to track your progress and identify potential issues early.

By implementing these strategies and maintaining a strong credit profile, you can position yourself to qualify for the best interest rates when applying for an auto loan, potentially saving you thousands of dollars over the life of the loan.

Refinancing Auto Loans for Lower Interest Rates

One of the most effective ways to reduce the interest costs on your auto loan is through refinancing. Refinancing allows you to replace your existing loan with a new loan, ideally with better terms and a lower interest rate. This process can potentially save you thousands of dollars over the life of the loan, making it a valuable strategy to consider, particularly if your credit score has improved since you initially took out the auto loan.

The Potential Benefits of Refinancing

The primary benefit of refinancing your auto loan is the opportunity to secure a lower interest rate, which can translate into significant savings. Refinancing at a lower rate can reduce your monthly payments, making it easier to manage your budget. Alternatively, you can choose to keep your monthly payments the same but shorten the loan term, allowing you to pay off the loan faster and reduce the overall interest paid.

Another advantage of refinancing is the ability to change the loan terms. If your current loan has unfavorable terms, such as a high-interest rate or a long repayment period, refinancing can provide an opportunity to renegotiate these terms and align them better with your financial goals.

Steps to Refinance Your Auto Loan

If you're considering refinancing your auto loan, it's essential to follow these steps:

Check Your Current Credit Score: Before applying for a refinance, check your credit score to assess your creditworthiness. A higher credit score will increase your chances of qualifying for better interest rates.

Shop Around for Rates: Research various lenders, including banks, credit unions, and online lenders, to find the best interest rates and terms available. Compare the annual percentage rates (APRs) and loan terms to identify the most favorable options.

Consider Refinancing Fees and Closing Costs: Refinancing often involves fees and closing costs, such as application fees, loan origination fees, and title transfer costs. Factor these expenses into your calculations to ensure the potential savings outweigh the upfront costs.

Calculate Potential Savings: Use an auto loan refinance calculator to estimate the potential savings you can achieve by refinancing. Compare your current loan's total interest costs with the refinanced loan's projected costs to determine if the savings justify the refinancing process.

When to Consider Refinancing

The ideal time to refinance your auto loan is when you can secure a significantly lower interest rate than your current loan. This is often the case if your credit score has improved substantially since you first obtained the loan. Even a small decrease in the interest rate can lead to significant savings over the life of the loan.

It's generally recommended to consider refinancing if you can lower your interest rate by at least one percentage point (1%) or more. However, the specific threshold may vary depending on the loan amount, remaining term, and refinancing costs.

Before pursuing a refinance, ensure you have made timely payments on your current loan for at least six months to a year. Lenders are more likely to approve refinancing applications for borrowers with a demonstrated history of responsible repayment.

Additionally, consider refinancing if you have equity in your vehicle, meaning the loan balance is lower than the vehicle's current market value. This equity can serve as collateral and increase your chances of securing a favorable refinancing deal.

Refinancing your auto loan can be a powerful tool for reducing interest costs and optimizing your financial situation. By following the steps outlined above and carefully considering the potential savings, you can decide whether refinancing is the right choice for you.

Florida Credit Union's Resources and Support

At Florida Credit Union, we understand the complexities of auto financing and the impact credit scores can have on interest rates and overall borrowing costs. That's why we're committed to providing our members with comprehensive resources and support to help them navigate the auto loan process and make informed financial decisions.

Understanding Credit Scores

One of the key resources we offer is our credit score monitoring service. As a Florida Credit Union member, you can access your credit score for free, with monthly updates, using our mobile app. This service empowers you to track your credit score over time, identify areas for improvement, and understand how changes in your credit profile may affect your eligibility for loans and interest rates.

In addition to credit score monitoring, we provide educational materials and resources to help you understand the factors influencing your credit score, such as payment history, credit utilization, credit mix, and length of credit history. Our financial education resources include articles, videos, and interactive tools which break down complex credit concepts into easy-to-understand formats.

Auto Loan Financing Options

Regarding auto loan financing, Florida Credit Union offers a range of options to suit your unique needs. Whether you're a first-time car buyer or an experienced borrower, our knowledgeable loan officers are here to guide you through the process and help you choose the best financing solution.

One of the advantages of working with us is our competitive interest rates. As a credit union, we prioritize our members' financial well-being over profit, which means we can offer lower rates than many traditional banks. Our rates are based on your credit score and other factors, ensuring you receive the most favorable terms possible.

Refinancing Opportunities

If you already have an auto loan with another lender, Florida Credit Union can help you explore refinancing options. Refinancing your existing loan with us can potentially lower your interest rate and monthly payments, resulting in significant savings over the life of the loan.

Our refinancing process is straightforward and designed to make the transition as smooth as possible. We'll work with you to review your current loan terms, assess your credit profile, and determine if refinancing is right for you. If it is, we'll handle the details of paying off your existing loan and issuing a new loan with better terms.

In addition to potentially securing a lower interest rate, refinancing with us offers several other benefits:

Consolidate Debt: If you have multiple car loans or other outstanding debts, refinancing with us can allow you to consolidate these into a single, more manageable payment.

Personalized Guidance: Our loan officers are dedicated to providing personalized guidance throughout the refinancing process, ensuring you understand all the details and feel confident in your decision. Learn more about refinancing your auto loan with Florida Credit Union. Here, you'll find detailed information on the refinancing process, eligibility requirements, and instructions on how to get started.

Taking Control of Your Auto Loan

We've explored the direct correlation between credit scores and auto loan interest rates. Your credit score plays a pivotal role in determining the interest rate you'll receive from lenders, with higher scores resulting in more favorable rates and potentially saving you thousands of dollars over the life of the loan.

By understanding key factors influencing your credit score, such as payment history, credit utilization, credit mix, and credit age, you can take proactive steps to improve your credit profile. Implementing strategies like paying bills on time, keeping credit card balances low, disputing errors on credit reports, and monitoring your credit regularly can help boost your credit score and position you to qualify for the best interest rates.

Refinancing at a lower interest rate can significantly reduce your monthly payments or shorten the loan term, ultimately saving you money on interest costs.

At Florida Credit Union, we are dedicated to empowering our members with the knowledge and resources needed to make informed financial decisions. From credit score monitoring services and financial education resources to competitive auto loan rates and refinancing opportunities, we strive to support you throughout your auto financing journey.