Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 9, 2021

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Cars are one of the most important purchases that American consumers can make. With a vehicle, a borrower has the power to commute to college, enabling them to gain an education that is necessary to compete in the current competitive job market. A vehicle allows a job seeker to attend interviews and it allows the already employed to commute to work.

While there may be high demand for vehicles, not all consumers can afford to pay in cash for new or used cars. Auto loans allow borrowers to purchase and use a car before they have the physical cash on hand to buy one themselves.

However, like all forms of lending, borrowers must pay this debt off. Borrowers can better understand this debt by searching for auto loan interest rate offers prior to obtaining a car loan. Those offered interest rates increase the amount of money owed by borrowers as time progresses.

But auto loan interest rates aren’t arbitrarily assigned to applicants. Instead, they’re assigned on a case-by-case basis.

In many ways auto loan rates reveal telling information about borrowers.

Imagine what somebody could deduce if they had a look at your offered interest rates. If someone saw somebody else’s auto loan rate, they could infer very much about that borrower.

A single glance at an auto interest rate would allow someone else to guess whether a borrower had a low or high credit score. They could make an assumption of whether or not a borrower is a risky customer in the eyes of lenders. Perhaps more worrisome is that onlookers could deduce whether or not a borrower repays their debts on time. All of this intimate financial information can potentially be gathered just by viewing a single number.

The Breakdown of a Rate

Auto loan rates are primarily derived from a borrower’s credit score.

A borrower’s credit score is created by credit reporting bureaus—Experian, Equifax, and TransUnion—and is based on the amount of debt an individual has borrowed and repaid. Missed payments, defaults, and incurred penalties are also factored into a credit score. Once lenders have this credit score they lump an applicant into one of two categories: prime or subprime.

Borrowers who pay their debts, have few outstanding balances, and make consistent payments typically have credit scores that are high or “prime.” Conversely, borrowers who do not make monthly payments on time and have high amounts of debts will have a low credit score that is considered “subprime.” Lenders desire prime borrowers since, in their eyes, prime borrowers make for the most profitable of customers in the lending world.

Since credit scores are factored into the interest-setting process, a high auto loan rate signifies that a borrower likely has a low credit score. Similarly, a low auto loan rate shows that a borrower probably has a high credit score. If an outsider saw a borrower’s interest rate, they could immediately conclude whether or not that individual is prime or subprime, which opens the door to whole array of other assumptions.

Despite lender promises, borrowers must remember that the amount of interest that is to be paid on an auto loan is far more influenced by borrowers themselves. Controlling their credit, purchases, and debt are the best ways for borrowers to show lenders that they are ideal customers worthy of generous auto loan rates.