How do interest rates work on car loans?Here’s the short version of everything you need to know:A car loan is when you borrow money from a bank or other lender to pay for the cost of a car. You then pay that lender back over time based on terms set at the time you get the loan.Interest is the cost of borrowing money from a lender. It’s what you pay to the lender on top of the cost of the car. There are different kinds of interest: simple, accrued, and compound. Most car loans use simple interest.The interest rate on a car loan is the formula used to determine how much you’ll pay your lender above the amount of money paid for the car. Your interest rate will be determined by factors like: your credit score and finances, your vehicle and loan-to-value, and broader market trends.Want to learn more? Keep reading for more in-depth explanations. The Complete Guide to Car Loan Interest Rates In this guide, we’ll cover:Car loan basicsInterest rate basicsInterest rates vs. APRHow car loan interest rates workFactors that affect the interest rate you’re offeredCar Loan BasicsWho needs a car loan?If you’re planning to buy a car, there’s a good chance you’ll need to finance at least part of the purchase. Most people do not buy a car in cash.Financing allows you to borrow some (or all) of the money for a large purchase and pay it back to the lender over a set period of time. Lenders will charge you interest, which is essentially the fee you pay for borrowing money. How do car loans work?Car loans are very simple in principle. When you want a car that you cannot afford to pay for in cash, a bank loans you the money to purchase the car. You get to take the car home and drive it as if it’s your own, but it is technically an asset of the bank. When you finish paying back the money that you owe your lender, plus interest, the bank signs the title over to you and you officially own the car.What is the difference between a car loan and a car refinance?They’re very similar:A car loan is the loan you get when you first purchase a vehicle. A car refinance is when you already have a car loan and decide to get a new loan that replaces the old one. Some people choose to refinance because it is a way to change the terms of a car loan, which are otherwise locked in for the duration of the loan.Considering a car refinance? Learn more about refinancing here.Interest Rate BasicsWhat is interest?Interest is the cost of borrowing money from a lender. There are three different types of interest rates which are all calculated in different ways:Simple interestAccrued interestComplex interestSimple interestSimple interest (also known as regular interest) is based on the outstanding principal and is paid as you go. For example: You borrow $1,000 with a 5% annual interest rate for three years.$1,000 x 0.05 x 3 = $150With simple interest, you would pay $50 per year ($150 total) in interest.Accrued interestAccrued interest accumulates and is unpaid until the end of the payment period.For example: You borrow $1,000 with a three year loan term and a 5% annual interest rate accrued every 30 days.$1,000 x 0.05 x (30 / 365) You would still owe $150 total, $50 per year, but it’d be paid as $4.11 every 30 days. Essentially, this is an accounting difference where you accrue 13.7 cents of interest per day and pay when you get to 30 days of interest accrued.Compound interestCompound interest is paid on the total of the principal and accrued interest. For example: You borrow $1,000 with a three year loan term and a 5% interest rate, compounding annually. That means that you pay interest on the interest, essentially.It’s calculated like this:Principal x ((1 + %interest)years of loan - 1) = total interest due over time$1,000 x ((1 + 0.05)3 - 1)$1,000 x (1.157625 - 1) = $157.27APR vs. Interest RateWhen it comes to car financing, the terms “APR” and “interest rate” are often used interchangeably. But this is not correct and they are not actually the same. The interest rate is the cost of borrowing the money, while the APR (or Annual Percentage Rate) is the interest rate plus any additional loan fees for which you are responsible. These fees, also referred to as “prepaid finance charges,” can vary widely from lender to lender. They typically cover costs associated with underwriting their loans and doing the necessary paperwork. It’s important to review the APR offered to you when looking at a loan, as it’ll give you a better picture of what you’ll actually be paying.How Do Car Loan Interest Rates Work?Car loan interest rates are almost always simple interest rates. A borrower is offered one fixed rate for the duration of their car loan. As the borrower pays down the principal, the amount of interest that they pay decreases until they have paid the loan back entirely. In some cases lenders may use precomputed interest. This means that at the start of your loan they determine how much you will pay in interest and your payments will be divided evenly. If you pay off your loan early, you will still be required to pay the predetermined interest, so you will be unable to save money as you would with a simple interest rate.What Factors Affect The Interest Rate You Will Be Offered?The car loan interest rate that is offered will be based on a number of different factors, including the market rates and the credit worthiness of the applicant. Here are some of the factors that affect the interest rate offered:Your credit scoreYour debt-to-income ratioMarket factorsYour vehicleYour down paymentThe loan termYour Credit ScoreYour credit score is the biggest factor that is within your control when it comes to what interest rate you will be offered. Your credit score is an indicator of how likely you are to make on-time, full payments every month. The better your score is, the better candidate you are for a car loan. The best interest rates will be offered to applicants with strong credit scores.Your Debt-To-Income RatioYour debt-to-income ratio is another huge indicator of how likely you are to repay your loan. If you have a lot of debt compared to how much money you make, you are considered less likely to repay your loan. The Market ConditionsThe credit score you are offered will also be based in part on the prevailing rates at the time. If interest rates are high in general you can expect to be offered a higher rate than at other times.The Vehicle You Are BuyingThe vehicle you are buying will also impact the interest rate you are offered. The most important factor is the age of the car. The older the car is, the higher the interest rate will be.Your Down PaymentThe size of your down payment will also have a large impact on your interest rate. The larger your down payment is, the less likely your loan is to become underwater (meaning you owe more money to your lender than the car is worth). Your loan-to-value makes a big difference for both securing a loan and refinancing.The Loan TermA longer loan term will generally mean a higher interest rate. It will also mean that you will pay more interest over the life of the loan because you will be paying interest for a longer time. Your monthly payments will be lower because they will be stretched out over a longer period of time, but you will (quite literally) pay for this in the long run.How Can I Get The Best Car Loan Interest Rate?To get the best car loan interest rate possible, prepare by doing the following:Work on improving your credit score.Request a copy of your credit report and review for any errors. Pay down debts where you can, focusing especially on loans with high credit utilization ratios.Save additional money so that you can make a more sizable down payment.Get preapproved before heading to the dealership.Apply with several lenders (3-5) so that you can compare the offers.Avoid selecting a long repayment period if you can. Be sure that the car you are purchasing will fit into your budget.Securing a low car loan interest rate will mean big savings in the long run, so it’s important to do your research and prepare as much as possible when buying a car. That’s How Interest Rates Work For Car LoansIf you are planning to buy a new car it is important to understand how car loan interest rates work and how you can get the best rate possible. If you already have a car loan and are unhappy with your current interest rate, get started with Auto Approve today to find out how much car loan refinancing can save you!Get a quote now.

If you’ve looked into your car loan refinancing options, you’ve probably heard about Auto Approve and wondered, is Auto Approve a legit company? The short answer is: Yes! Auto Approve is legit. As of 2025, Auto Approve has: An A+ from the Better Business BureauA 4.7 on TrustPilotA 4.5 on Consumer AffairsPositive reviews from NerdWallet and LendingTreeAuto Approve works with credible lending partners to offer competitive refinance rates with no mark-ups. Auto Approve does not sell, rent, or lease its customer lists to third parties. (For more details, please refer to our FAQ page and privacy policy!)But you probably have more questions, like, is Auto Approve a direct lender? And how does the process actually work? In this guide, you’ll learn all about Auto Approve, how the refinance process works, and how Auto Approve works to get you the best deal possible on your car loan refinance.Everything You Need To Know About Auto ApproveWhat does Auto Approve do?Auto Approve works with a group of top lending partners to find you the best refinance offer to fit your needs. Auto Approve is not a direct lender. When you refinance with Auto Approve, Auto Approve will gather offers for you from our network of lending partners, then an Auto Approve representative will work with you directly to find the right refinance for your unique financial situation. Auto Approve advocates for you as you navigate through the world of refinance, then handles the paperwork for you when you choose the refinance that’s right for you.  What products does Auto Approve offer?Vehicle refinancingAuto lease purchaseGAP insuranceVehicle protection plansRead on to learn more.Vehicle RefinancingRefinancing means paying off your existing vehicle loan with a new one, ideally with more favorable terms. People choose to refinance to:Save money by lowering their interest ratePay less each monthAdd or drop a co-borrowerOtherwise change the terms of their auto loanCar loan refinance is Auto Approve’s primary offering. If you are looking to refinance your loan, Auto Approve can help you to:Determine if the time is right to refinance your loanConnect you with the best lenders for your refinanceHelp you applyFinalize the paperwork (including DMV paperwork)We can help you refinance your car, truck, SUV, and even your motorcycle.Auto Lease PurchaseIf you have a leased car that you want to own, a lease buyout loan is a way to purchase your leased car. You can typically buy your leased car for the price of the residual value of the vehicle, plus any taxes and fees. Unless you have that money in cash, you will need to get an auto lease buyout loan to make the purchase. GAP InsuranceGAP insurance is optional insurance that kicks in when there is a gap between what insurance covers and what you owe on your car.For example, let’s say you still owe $10,000 on your car when you get into an accident. Your car insurance decides that they will only pay out $8,000 in damages. This means that you are still responsible for $2,000 to the lender. GAP insurance would cover this so that you do not have to pay this amount. Vehicle Protection PlansA vehicle protection plan offers additional coverage on your car for maintenance and repairs. Vehicle protection plans can be used with your manufacturer’s limited warranty or they can be used when the limited warranty expires. When you refinance with Auto Approve, you can also bundle a vehicle protection plan into your low monthly payments. Bundling a plan will give you additional protection should something go wrong with your car.Vehicle protection plans from Auto Approve come with added benefits, such as:24/7 roadside assistanceUp to $50 per day rental reimbursementCourtesy towingYour choice of certified-ASE mechanic Is Auto Approve legit?Auto Approve is a legitimate company. Auto Approve was on the Inc. 5000 list of fastest growing private companies in America in 2022, 2023, and 2024.Auto Approve has an A+ rating with the Better Business Bureau, a 96% would-recommend rating on LendingTree, and a 4.7 out of 5 star rating on TrustPilot, where you can read over 12,000 real customer reviews. Auto Approve customers know that we can find them the best deals on car loan refinance and love our customer service. We know that sometimes you need to talk to a real person to get real results, so our live agents are here to work with you and give you the personalized attention you need and deserve.How does a vehicle refinance work with Auto Approve?Here are the steps to refinancing:Determine whether now is a good time for you to refinanceShare basic details with Auto Approve to get a starting estimate and confirm eligibility (soft credit check only)Gather necessary documentsApply through Auto Approve to get offers from our lenders (hard credit check required)Work with your advisor to determine the best refinance for youFinalize the refinance (Auto Approve handles the paperwork!)Step 1. Determine if the time is right to refinance your car loan.The first step to refinancing your car is determining if you should refinance in the first place. It might be a good time to refinance your car loan if any of the following apply to you:Your credit score has improved since you initially financed your car.The market rates have decreased since you initially financed your car.You want to add or remove a cosigner.You need some extra breathing room every month and want to lengthen your repayment plan. Step 2. Contact Auto Approve.If now seems like a good time to refinance your car loan, the next step is to fill out some basics about your vehicle and current loan to get a quote from Auto Approve. From there, our team can help you determine if you will qualify for loan refinancing, and can even get you some preliminary offers in minutes.At this stage, only a soft credit check is required to confirm whether you’ll be eligible to refinance, but a hard credit check will be required to get confirmed offers later in the process. Step 3. Gather your documents.After you chat with an Auto Approve expert, they will help you determine where you should apply. You will need to gather the necessary documents, which will include:Current loan information. You will need the name of your current lender, your account number, and your payoff amount. It’s good to have the contract handy to compare specific terms as well. Personal information. You will need identification, proof of employment, proof of residence, and your contact information.Vehicle information. You will need your car’s VIN, make, model, year, and mileage. Step 4. Apply.Once you have all of your information collected, Auto Approve will help you apply to the lenders that will best suit your needs.  Step 5. Compare and sign.When the offers roll in, you will need to decide which loan is right for you (Auto Approve can help you with this too!). Once you decide which loan is right for you, you can simply sign on the dotted line. Auto Approve will make sure that your old loan is paid off and that your new loan is ready to go. It’s that simple! Auto Approve will even handle the DMV paperwork for you. Auto Approve is legit – and a great partner for your vehicle refinance!Now you know all about Auto Approve and how Auto Approve helps customers find the best refinance for their needs.If you think you’re ready to refinance your vehicle, Auto Approve can help connect you with the lender that’s right for you.GET A QUOTE IN 60 SECONDS

If you are applying for a new car loan, you’re probably wondering what lenders will take into consideration. What do the big banks look for, and how can you be sure that you will be approved for a new car loan? Here’s the short answer.When you apply for a car loan – whether a new loan on a new vehicle or a refinance on an existing loan – the key things lenders will look at are: your current income and income history, your credit score and credit history, your personal information, the vehicle you’re hoping to finance, and either your down payment or your existing loan.Read on to get into the details of how banks determine car loan eligibility (and how you can make sure you qualify).Car Loan Eligibility: Everything you Need to KnowIn this guide, we'll review:How banks determine if you qualify for a car loanWhat’s considered a good credit score for a car loanQualifying for a car refinanceHow do banks determine if you qualify for a car loan?Your incomeYour credit scoreYour personal detailsYour down paymentLenders will look at a lot of information when determining whether or not you are eligible for a new car loan. Your current finances, your credit score, and other factors are all considered when determining eligibility.Your current incomeLenders want to see that you have steady income. Lenders will want to see current pay stubs if you are a W-2 employee (usually they will want to see more than one). If you are self employed or receive social security, you may need to provide bank statements. The lender will tell you what documents you will need to provide. They will also look at how your income compares to your debt (your debt-to-income ratio).Your credit scoreWhen you apply for a car loan lenders will pay special attention to your credit score. Your credit score is an indication of how likely you are to repay your loan, so the higher your score is, they will view you as more likely to repay your car loan. A good credit score will also help you to secure the best car loan APR possible.Your Personal Details: identity and residenceLenders will need to verify that you are who you say you are. They also need to know where you live so that they can repossess the car should you fail to make payments. A government issued ID is usually required for this. If you do not have one, a utility bill or lease agreement may suffice.Your down paymentAre you wondering “how does increasing the size of your down payment impact your auto loan?” The answer is, a lot. Lenders feel more comfortable giving you a car loan if you make a down payment. It will also mean that you have to borrow less money and will in turn get a more favorable car loan APR.What Is A Good credit score for a Car loan?A good credit score means you are a more trustworthy loan candidate in the eyes of the lender. Credit scores can be broken down into five categories: Exceptional (Super prime): 781 to 850Very Good (Prime): 661 to 780Good (Non prime): 601 to 660Fair (Subprime): 501 to 600Poor (Deep subprime): 300 to 500 There is no hard and fast rule for what credit score you need to have to secure a car loan, but generally you will have an easier time getting a car loan if your credit score is above a 620. But don’t just take our word for it. Experian data from the first quarter of 2025 provides data on the car loan APRs offered by credit score (for new cars).Super prime (781-850) average APR offered: 5.18%Prime (661-780) average APR offered: 6.70%Near prime (601-660) average APR offered: 9.83%Subprime (501-600) average APR offered: 13.22%Deep subprime (300-500) average APR offered: 15.81% Additionally it found that 65% of borrowers had a credit score above 661, while only 2% of borrowers had a credit score below 500. So while it is clearly not impossible to finance a car with a poor credit score, it is significantly more difficult and borrowers are offered much higher car loan APRs.How do banks determine if you qualify for a car Refinance?Your existing loanYour vehicleYour financesIf you are looking to refinance your current car loan, you may be wondering what requirements to refinance a car there are. The refinance requirements are similar to those of simply applying for a new car loan, but your current loan and vehicle must also be taken into consideration.Your Current Car loanWhen it comes to car refinancing, lenders want to see that your current loan is at least six months old (although experts recommend waiting a year to refinance to give your credit score time to settle again after your initial financing). This will show that you can make your payments for this loan on time and in full. Some lenders might not require this, but you will need to at least wait until the car’s title is in the possession of your current lender. This can take weeks or even months for the paperwork to get straightened out. Lenders will also consider the time remaining and the balance remaining on your loan. Lenders usually have requirements for how much time is left on your loan (two years is pretty standard). Lenders also typically have requirements for how much of a balance remains on your car loan ($5,000 is another typical amount). If you do not have a lot of money or time remaining on your car loan you may have a difficult time qualifying for a car loan refinance.Your vehicleLenders will also consider the car you are refinancing. If your car is too old or has too many miles on it (more than ten years old and/or more than 100,000 miles) lenders may not approve you for refinancing. Some lenders will refuse to refinance certain makes and models, such as large engine or commercial vehicles. Your vehicle’s history will also be taken into account by lenders. If your car has been in a significant accident or had water damage this might be an issue for refinance.The loan to value on your current vehicle is another piece that lenders will consider when it comes to refinance. Your LTV is the total amount of your loan divided by your vehicle’s actual cash value. If this number is more than 125%, you may have a hard time getting approved for a car loan refinance. Other considerationsIf you want to refinance your vehicle, lenders will consider many of the same factors as they did when you got your initial financing:Your current income and debt-to-income ratioYour credit scoreYour identity and residenceThe down payment you made to purchase the vehicleWhen applying for car loan refinance you should prepare yourself as much as possible by ensuring your credit score is in tip top shape.That’s how banks determine car loan eligibility for both new cars and Car refinancingLenders look at a lot of information when determining whether or not you will qualify for a car loan. It’s a good idea to gather as much information as you can ahead of time and work on your credit score to give yourself the best chance possible of getting approved.If you are considering car loan refinance, Auto Approve is here to help! Our experts can guide you through the process and help find the lender that is right for you.So what are you waiting for? Get your free quote today!GET A QUOTE IN 60 SECONDS