Used-Car Loans: Southern States See Higher Interest Rates

Auto Loans, Loans
Used-car loans: A state by state comparison

How does your used-car loan stack up against others in your state and around the U.S.? Using data from credit agency Experian, NerdWallet looked at loan trends at the state level, including average loan amounts, interest rates and monthly payments. We found that loan rates and terms for used vehicles varied widely among the states, with residents in the South paying the most in financing costs while also taking out the longest-term loans.

The map below includes data for all states except Delaware, Oklahoma, Rhode Island and Wyoming. Click on a category, then hover over a state to see its data. Darker colors represent higher numbers.



Key takeaways

  • Loan costs are the result of multiple factors. A holistic approach is necessary to understand average loan rates and balances, especially at the state level. To understand why residents of some states pay more, you must consider the type of vehicle financed, its cost, the length of the loan, the interest rate and the credit history of the borrower. Louisiana residents have the highest average loan amounts, at $22,445. Michigan sees the lowest average figure at $15,959.
  • Credit matters. The average used-vehicle loan interest rate is higher in Southern states, and credit is a big factor. Seven of the 10 states with the highest interest rates are in the South, including Mississippi, South Carolina, Alabama, Georgia, Florida, Louisiana and Texas. Mississippi is No. 1 at 11.47%.
  • Longer loan terms are costlier. This is because you accrue interest over a longer period of time, and sometimes have to pay higher interest rates to get that longer term. Louisiana has both the highest average loan amount and loan term.

Loan rates and terms by state

Used-car rates and terms varied significantly from state to state, depending on the factor. For example, consider the average loan in Louisiana, with $7,202 in interest paid over an average of more than 66 months. Compare this to the average loan in Michigan, which would cost $4,037 in interest over less than 61 months. That’s a difference of $3,165, due to several factors, including a lower loan balance, the shorter length of the loan and a lower interest rate.

We found that the states with the highest average auto loans didn’t necessarily all have a single factor in common. Instead, several factors work together to determine loan costs. For example, when we looked at interest rates and the length of loan terms for the 10 states with the highest average loan amounts, we found that six of them had average interest rates higher than the U.S. average rate, and nine of them had average terms longer than the U.S. average.

Credit matters

The power of your credit has a direct effect on your bottom line when it comes to auto loans. Residents in the 10 states with the highest average interest rates tend to have credit scores in the average range. Compare that to the 10 states with the lowest rates: Residents in seven of them have good credit, on average. Higher credit scores mean lower interest rates, and the savings can be significant.

For example, let’s say you take out a $20,000 loan for 60 months. The difference between the highest and lowest average interest rates in our study (11.47% vs. 6.72%) results in a savings of more than $2,700 over the life of your loan.

We noticed that many of the highest interest rates came from Southern states. Residents of the Deep South — including Louisiana, Mississippi and Georgia — have some of the lowest credit scores in the U.S. No matter where you live, it’s important that you work to improve your credit. This will help you qualify for lower rates and a more affordable used car or truck purchase.

Longer loan terms mean more interest paid

Longer-term loans mean smaller monthly payments, a figure that many consumers — and car dealers — tend to focus on. But lower payments via longer terms mean you pay much more in interest.

Let’s say you take out a $20,000 used-vehicle loan with the U.S. average interest rate of 8.7%. With a 60-month term, your monthly payment will be $412 and you’ll pay $4,736 in interest over the life of your loan. With a 36-month term, your monthly payment will be higher at $633, but your interest will be only $2,795. That’s a savings of $1,941 by choosing a shorter term.

So it follows that of the 10 states with the longest loan terms, six also make the list of the 10 states with the highest average loan amounts. Along with the fact that extended terms mean you pay more in interest, many lenders charge higher interest rates for longer-term loans.

How consumers can save money on auto loans

The smartest way to reduce loan costs is by looking at all the factors and working to make them more favorable. No matter what state you’re in, there are plenty of ways to save money on auto loans. Here are a few tips to shave money off your bottom line:

Borrow from a credit union

Although you can get your loan directly from the dealership or a bank, there are often lower rates to be had through your local credit union. According to The New York Times, the current average interest rate for a 36-month used-car loan is 3.25%. With credit unions, you may be able to qualify for rates at or around 2%. This results in a decent chunk of savings for you over the life of the loan. Check out NerdWallet’s auto loan calculator guide to see how different rates may affect your total amount owed.

A credit union car loan may also be easier to qualify for, especially if your credit score isn’t excellent. Consumers with average credit probably won’t be able to secure the lowest rates, but they’re more likely to get approved for a loan from a credit union.

Finally, credit unions are not-for-profit organizations, so you won’t have to deal with pushy sales pitches when applying for a loan. Learn more about getting an auto loan from a credit union.

Choose a shorter loan term

Used-auto loan terms are getting longer — with more than 60 months being the norm, according to Experian. It’s tempting to choose the longer loan terms in order to reduce monthly payments, but a shorter term will probably lower your overall costs. When you choose loan terms of more than 60 months, you’re accruing interest for an extended time and putting less toward paying down your principal. If you instead choose a 36- or 48-month loan, you can save money.

It’s also a good idea to choose a shorter-term loan because sometimes longer loan terms come with higher interest rates. This won’t always be the case, but it’s something to be aware of when you’re comparing loan terms.

Rethink the size of vehicle you need

Although trucks or SUVs may be necessary for consumers who regularly haul heavy cargo or have large families, other consumers might be wise to choose a smaller vehicle. As a general rule, standard sedans are more affordable than large vehicles, so your loan will probably be for a smaller amount. On top of that, you’ll probably get better gas mileage, saving you cash at the pump.

Improve your credit score

To qualify for the best rates, it’s important to have a good credit score. If your score is lacking, here are a few steps to take to get it back on track:

  • Make every payment on time. This is the most important factor in your credit score, so it should be your main focus. If remembering due dates is tough for you, set up automatic payments or email reminders for each of your bills.
  • Keep utilization low. If you use credit cards, make sure the utilization — or the percentage of your credit limit that you’re using at any given time — is low. There’s no perfect number, but somewhere below 30% should be your target (and the lower, the better).
  • Check your credit reports annually. Your credit score is calculated based on data from your credit reports, so make sure they’re accurate. Each year, you can get free reports from AnnualCreditReport.com. If you find any mistakes, take these measures to dispute them.
  • Be patient. Building excellent credit takes time, and as your average age of accounts lengthens, your score will improve. Enjoy watching your score go up and, if possible, try to wait until your score is in great shape before applying for loans.

Methodology

All data points are from January 2015 to June 2015 and are provided by Experian, which did not have data for four states — Delaware, Oklahoma, Rhode Island and Wyoming — as well as Washington, D.C. Sales tax was not taken into account, as it can vary by locality.

Victoria Simons is a senior analyst covering loans and insurance for NerdWallet.