Answer: 15.96% [Subprime: 501 – 600 credit score]

Credit Tier (Credit Score) Average Interest Rate New Car Loan Average Interest Rate Used Car Loan Super Prime (781-850) 2.47% 3.61% Prime (661-780) 3.51% 5.38% Nonprime (601-660) 6 .07% 9.80% Subprime (501-600) 9.41% 15.96% Deep subprime (300-500) 12.53% 19.87%


Give an example of an action that could cause a borrower to have “bad credit”? How does interest affect the monthly payment of a car loan? Explain. Suppose a borrower with bad credit took out a $20,000 car loan. Estimate what the total cost of the loan would be for a 60-month loan.

Here are the ready-made slides for this question of the day that you can use in your classroom.

Behind the numbers (CarsDirect):

Let’s look at the impact of higher interest rates on a car loan, using an example. Suppose you buy a used car and the loan is $14,000 with a term of 60 months (five years). See how different car loan interest rates affect the monthly payment and the total cost of the car:

Credit Tier (Credit Score) Interest Rate Monthly Payment Interest Paid Total Cost Super Prime (781-850) 3.61% $255.37 $1,322 $15,322 Prime (661-780) 5.38% $266.64 $1,998 $15,998 Nonprime ( 601-660) 9.80% $296.08 $3,765 $17,765 Subprime (501-600) 15.96% $340.16 $6,409 $20,409 Deep Subprime (300-500) 19.87% $369.90 $ 8,194 $22,194

If you use the average used car loan interest rates from the first table, you can see that as credit scores fall and interest rates rise, the total cost of borrowing rises dramatically.

Discuss the basics of credit scoring with your students using the NGPF activity INTERACTIVE: FICO Credit Scores!

Would you like to expand this activity so that students can calculate the cost of bad credit themselves? Watch this NGPF Activity, Calculate: Impact of Credit Score on Loans

About the author

Mason Butts

After graduating from UCLA with a Masters in Education, Mason spent 5 years as a science teacher at a public high school in South Los Angeles. He is committed to supporting the holistic growth of all students and enabling them to live lives of relational, academic and financial success. Now based in the Bay Area, Mason enjoys facilitating professional development and partnering with educators to prepare students for a bright financial future. When Mason isn’t creating a curriculum or planning a workout, he can ride a bike, try new foods, and explore the great outdoors.

This post Question of the day: what is the average interest rate on a car loan for someone with bad credit?

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