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Key takeaways
- Auto loan interest rates can vary significantly between states because each state sets its own usury laws, or caps on the interest a lender can charge.
- The ceiling on the interest rate you could be charged is linked to your lender and where its headquarters is located.
- There is no federal cap on interest rates, but military service members fall under special regulations through the Military Lending Act and the Servicemembers Civil Relief Act.
The highest rate on a car loan involves a few factors, including what state you live in and how much money you’re borrowing. There is no set federal maximum, although some states do set caps.
According to data from Experian, average rates range from 5.38 percent to 21.57 percent, depending on credit and vehicle type. And these are just averages — individual lenders may charge max rates of 30 percent or more.
Max auto loan interest rates differ by state
You might think about a bank or dealership as the place where your interest rate is determined. But the final word on the maximum interest rate you can be charged is determined by 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 aren’t really 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 it is based. There is 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.” If you live next door in Nevada, a lender could technically charge you any rate it wants because Nevada has no usury laws. And if you live in California but finance 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 loans with shorter-term loans have higher interest rate caps than larger, longer-term loans. For example, Colorado allows a whopping 91 percent APR on $500, six-month loans but sets the cap at 31 percent for a $2,000, two-year loan.
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 your state’s attorney general. Many states have penalties in place for unfair or deceptive lending. There is also a chance you’ll get back any interest you pay on the loan if you’re charged more than the legal limit.
Max auto loan interest rates differ by credit score
Another factor that plays a significant role in the interest rate you receive for an auto loan is your credit score. Credit score will impact the average interest rate lenders offer. This is because lenders generally rely on your FICO score or VantageScore when underwriting a loan.
These two scoring models allow lenders to get a snapshot of your financial track record, including your payment history, credit utilization and credit mix, among other factors. The best interest rates on auto loans are offered to applicants whose scores are in the mid-600s or above.
Special protections for military service members
The Military Lending Act and Servicemembers Civil Relief Act limit the interest rates lenders can charge active duty service members and their families.
- Military Lending Act. This act applies to active duty service members, their spouses and certain dependents. It places an interest rate cap of 36 percent on unsecured auto loans. Most auto loans are secured by the car being purchased, however.
- Servicemembers Civil Relief Act. Originally passed in 1940, this allows interest rates on loans taken out prior to becoming a service member to be cut down to 6 percent for the duration of active duty.
The bottom line
When you’re ready to shop for financing, start by comparing auto loan rates. Because there are no federal limits on the interest a lender can charge for an auto loan, pay attention to your state’s usury laws.
A higher credit score likely won’t land you in the upper range of auto loan rates, but if you only qualify for high rates, focus on improving your credit score to position yourself for the most competitive financing offers.
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