Auto loans aren’t all created equal. As you look at different options, you need to focus on the interest rate attached to every loan offer. If you’re wondering what the highest rate on a car loan can be, the answer involves a few factors including location and how much money you’re borrowing.
Max auto loan interest rates differ by state
You might think about a bank or a car dealer as the place where your interest rate is determined. While it is true that those places have a say in the figure attached to your loan, the final word on the maximum interest rate you can be charged lies with your state’s legislative government.
States are in charge of usury laws, which is a legal framework designed to set a cap on the amount of interest a lender can charge a consumer. If you have impeccable credit, usury laws really aren’t something to worry about — you’re in line for the best offer possible. However, if you have a history of late payments, excessive spending or bankruptcy, you might be in a situation where you’re in line for a sky-high interest rate. The height of that sky will look different depending on your lender and where your lender’s headquarters are located.
There is a wide gap across the country when it comes to usury laws. In California, a 10 percent limit applies to “money, goods or things in action.” If you live next door in Nevada, though, a lender could technically charge you anything they want, because the state has no guidance for maximum usury laws.
These rates vary by state, but it isn’t about where you are located and plan to get behind the wheel. It’s about where your lender is located. So, if you’re buying a car in California, but you’re borrowing money from a lender based in Nevada, you might see an offer for an extremely high interest rate.
How to check your state’s usury laws
Since the federal government has no set framework for interest rates on auto loans, you will need to do some research to find more information on your state’s usury laws. The best place to start is a directory from the Conference of Bank State Supervisors, which offers an interactive map of usury laws across the country.
As you browse the tool, keep in mind that legal language can be confusing, and there are plenty of exceptions. You may come across a set maximum interest rate “unless otherwise agreed upon.” So, while a state’s limit might be 9 percent, if you sign a contract for 14 percent, you are agreeing to a more expensive loan.
If you believe that a lender is offering you an interest rate that breaks the law, it may be worth contacting a lawyer or reaching out to the office of your state’s attorney general. Many states have penalties in place: If a lender charges an excessive interest rate, you may get the interest back but still must pay the principal.
Alternatives to bad credit car loans
If you’re trying to figure out the maximum auto loan rate you can be charged, chances are you have less-than-perfect credit. Rather than let that “fair” credit score get you locked into a deal with an excessively high interest rate, it’s wise to explore other options that can be better than a bad credit car loan.
- Find a cosigner: One of the best ways to make a lender more likely to loan you money is to have another signature — from someone with better credit — on the contract. If you have a family member or friend who is willing to vouch for you, it can go a long way to helping you lock in a lower interest rate. This option comes with some serious weight, though: If you miss any payments, it can create a rift with your cosigner.
- Explore personal loans: While you’re buying an auto, you don’t necessarily have to use an auto loan to do it. Instead, you might be able to qualify for a personal loan to cover the costs. Some of Bankrate’s top bad-credit personal loans start with lower APRs and accept poor credit scores.
- Wait: The final option is to hold off. If you can manage without the car for a few more months, take steps to improve your credit score. Pay down your credit cards, and take advantage of options like Experian Boost and UltraFICO to increase your score. The higher your score, the lower your interest rate will be.
The bottom line
Figuring out the maximum auto loan rate you can be charged isn’t an easy answer. Start by comparing auto loan rates on Bankrate with the “needs work” tab selected for your credit score and look at limits in place in your state. Once you have an idea of the best offers that you might be able to qualify for, focus on improving your credit score to earn an even lower rate.
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