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Auto loans aren’t all created equal. As you look at different options, you need to focus on more than the interest rate attached to every loan offer. According to Experian first quarter data, average rates range from 5.18 percent to 21.32 percent, depending on credit and vehicle type. And these are just averages — individual lenders may charge max rates of 30 percent or more.
But if you’re wondering what the highest rate on a car loan can be, the answer involves a few factors, including what state you live in 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. But the final word on the maximum interest rate you can be charged lies with your state’s legislature.
States oversee usury laws, a legal framework designed to cap the 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 may only qualify for a sky-high interest rate.
The ceiling on the interest rate you could be charged depends on your lender and where its headquarters are located. There’s a wide gap in limits from state to state.
To illustrate, a 10 percent limit applies to “money, goods or things in action in California.” But if you live next door in Nevada, a lender could technically charge you anything they want, because the state has no guidance for maximum usury laws. And if you live in California and are buying a car through a Nevada-based lender, you could still be offered an extremely high interest rate.
Other important factors include your loan amount and term length — in most states, smaller, shorter-term loans have higher rates caps than larger, longer-term loans do. For example, Colorado allows a whopping 91 percent APR on $500, six-month loans but sets the cap at 31 percent for $2,000, two-year loans.
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, remember 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. There’s also a chance you’ll get back any interest you pay on the loan if you’re charged more than the state’s legal limit.
Special protections for military servicemembers
If you are an active servicemember serving in the U.S., special laws limit the interest rates lenders can charge you. Check out these two relevant laws, though be aware of exceptions and limitations.
- Military Lending Act. This act applies to active duty servicemembers, their spouses and certain dependents signing off on unsecured auto loans. It places an interest rate cap at 36 percent. Most auto loans are secured by the car being purchased, however.
- Servicemembers Civil Relief Act. Originally passed in 1940, this allows doe interest rates to be cut down to 6 percent for the duration of active duty. So if you took out an auto loan prior to being deployed you can reduce the rate when you are on deployment.
Alternatives to bad credit car loans
If you’re researching maximum interest rates on auto loans in your state, 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 before signing a bad credit car loan.
Find a co-signer
One of the best ways to make a lender more likely to loan you money is to have a co-signer — with a higher credit score than you — 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 co-signer as the responsibility for the loan will fall on them.
Explore personal loans
You’re not obligated to use an auto loan to buy a car. Instead, you might be able to qualify for a personal loan to cover the costs. Some of Bankrate’s top bad credit personal loans have lower credit score minimums. But you may end up getting rates similar to what you would with an auto loan, so prequalify before you sign.
The final option is to hold off on a car loan. 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
A higher credit score won’t land you in the upper range of auto loan rates, assuming you earn enough to make the loan payments and your debt load is acceptable to the lender. But if your credit score is on the lower end, focus on improving it to position yourself for the most competitive financing offers.
When you’re ready to shop for financing, start by comparing auto loan rates. Once you have an idea of the best offers that you might be able to qualify for, decide it’s best to move forward or hold off and spend time working on your credit health to earn an even lower rate in the future.