When you shop for a car, one of the biggest challenges can be finding a loan you feel comfortable with. Lots of factors impact what type of financing you can get and your rates, like your credit score.
When you know the average car loan interest rates for your credit score, you can determine what kind of annual percentage rate, or APR, you can expect. In general, you’ll get a lower interest rate if you have a high credit score.
Here’s what you need to know about average car loan interest rates, including how you can find a better interest rate for your situation.
What Factors Determine Your Car Loan Interest Rate?
If you want to figure out the average car loan interest rate for buyers like you, you should know which factors potential lenders will consider. Even if you already know what kind of car you want, knowing this information can help you decide if now is the best time to buy a car, or if you should wait until your financial situation improves:
The biggest factor in this decision is your credit score. Your credit score is a numerical value between 300 and 850 that tells a lender how reliable you are as a borrower.
If you have a score of 850, your credit history is excellent. You’d be considered a very safe borrower.
However, a score of 300 indicates that you’re an extremely risky borrower. If you have a high credit score, you can expect your car loan interest rate to be quite low. If you have a low score, your interest rate will be higher.
Your lender will also consider the type of vehicle you want to buy. A new car will come with a lower interest rate, but used cars often have higher interest rates due to the rate at which cars depreciate. The make, model, and mileage of the car you’re considering will also come into play.
Down Payment Amount
The money you put down on a car, as well as any cars you trade in, will reduce the amount you borrow from the lender. When you borrow less money, you’ll pay less interest.
Lenders also factor in the loan-to-value ratio, which is the percentage of the car’s value that you’ve borrowed.
When you put down a larger down payment, you borrow less of the car’s value, so your interest rate may be lower.
The next factor is the loan term. If you opt for a longer term, like 84 months, you can count on a low monthly payment and a higher interest rate.
A short-term loan may come with higher monthly payments, but you’ll pay less in interest. Most lenders give you the opportunity to pay off a loan more quickly by making payments on the principal only.
What is the Average Car Loan Interest Rate?
The average interest rate for auto loans on new cars in 2022 is 4.07%. The average interest rate on loans for used cars is 8.62%.
If you have a high credit score, you can expect your interest rate to be slightly lower than these figures. Additionally, the average loan term is currently 69.48 months for new cars and 65.73 months for used cars, according to Experian.
Average Car Loan Interest Rates Based on Credit Score
Excellent Credit (750+)
If you have excellent credit, which means you have a credit score of 750 points or higher, you’re considered a low-risk borrower.
As a result, you can probably get a low interest rate on a car loan plus some additional financing incentives. Average auto loan interest rates are about 2.96% for new cars and 3.68% for used cars.
Good Credit (700-749)
If you have good credit, which is typically above 700 but below 750, you’re a prime borrower.
In this case, you’re likely to receive a below-average interest rate for your auto loan. You could be eligible to receive an interest rate of 4.03% on a new car and 5.53% on a used car.
Fair Credit (600-699)
If you have fair credit, your score is likely in the 600s. You may pay more to borrow money because you are slightly more risky in the eyes of a lender.
Still, your overall risk is pretty low, so you can get a decent interest rate. Non-prime lenders in this category have an average interest rate of 6.57% for new cars and 10.33% for used cars.
Poor Credit (599 and below)
If you have poor credit, your credit score is likely below 600. You can expect your lender to offer an interest rate of 9.75% to 12.84% for a new car and 16.85% to 20.43% for a used car.
These are higher interest rates because you’re deemed a higher-risk borrower. Ultimately, it’s more expensive to borrow money when you have poor credit.
If you have poor credit, the dealer may allow you to take the car, but the dealer might tell you that the loan is contingent or conditional.
If the lender doesn’t approve of the terms the dealership offered you, you might see the interest rate increase. It’s a good idea to finalize all loan details before you leave the dealership with a car.
What Does This Mean For Monthly Payments?
A low car loan rate can save you some money in the long run, especially with lower payments. Your loan payments will be much lower if you have good or excellent credit and choose a shorter term.
When you receive the conditions of your loan, you will get information about the specific payments you’ll make each month.
If you’re unsure of how long you want your loan term to be, spend some time thinking about the total interest you’re going to pay.
While you might have significantly lower payments each month, the amount you save could be completely negated by the fact that you could be paying thousands of dollars more over the loan term.
What Does Your Credit Score Tell a Lender?
You can use your credit score to predict your potential auto loan interest rate. Your credit score tells lenders the likelihood that you’ll make your monthly payments on time.
A high credit score reduces your interest rate, but you may want to know exactly how your credit will impact your rate. These are some of the factors that impact your credit score and what they tell the lender:
First, the lender will consider your payment history. This is one of the most significant factors that contribute to your credit score.
If you have delinquent accounts in your recent history, they could be a red flag to a potential lender that you haven’t always made payments on time.
The amount you owe to other lenders will impact your credit score. The lender will consider not only your total debt but also the amount of debt you have compared to the credit available to you.
For instance, if you use 90% of your available credit, your credit score is going to be much lower than if you were only using 20%.
The amount of time that you’ve had open accounts with creditors will also impact your credit score. If you have accounts over a decade old, you’re going to present a stronger credit history than somebody with new credit.
Opening new credit can cause your credit score to dip, which is why you may not want to open new accounts immediately before you apply for an auto loan.
Hard Credit Inquiries
Many people don’t think about the fact that hard inquiries on your credit report can reduce credit scores. A hard inquiry is when a company checks your credit report, which can lower your score temporarily.
For this reason, you should consider reducing your car shopping to a short period of about two weeks, which will generally only show up as one hard inquiry. This can minimize the effect of a hard inquiry on your credit score.
Why Does Your Auto Loan Interest Rate Seem High?
Your loan’s interest rate may seem high for factors beyond your control. Even if you have great credit, the lender is likely still considering interest rates set by the Federal Reserve. The Reserve can increase or decrease auto loan interest rates, depending on the market.
Your interest rate could also seem high because some lenders simply charge higher interest rates. Some lenders may start offering financing at 3.29% for borrowers with excellent credit, whereas others might start at 4.74% for the exact same applicant. Getting information from multiple lenders could save a lot of money.
Are There Ways to Lower Your Auto Loan Interest Rate?
If you’re unhappy with the average auto loan interest rate available for your credit score, there are some ways to potentially lower your rate. Here are some tips:
Improving Your Credit Score
If you’re able to take a few months to improve your credit score, you can lower your interest rate. One of the best ways to do this is to lower your debt-to-income ratio by paying down other debts you owe. You can also continue to make on-time payments to reduce the impact of recent late payments.
A higher credit score will help you qualify for better loan rates, but it may take several months for you to improve your score. Some people see faster results when they make two payments each month instead of one, depending on how often the creditors report to credit bureaus.
Increasing Your Down Payment
You can also lower your interest rate by increasing the down payment on the car. Paying more upfront means paying lower interest over time. You’ll require financing for less of your vehicle, so you can also reduce your loan term.
Refinancing Your Vehicle
You also have the option to refinance your vehicle. Even if you take a loan with a higher interest rate now, you can refinance after several months of on-time payments and receive a lower interest rate after factors like your credit score have changed. You might have to make larger payments for now, but you’ll spend less overall.
Apply With a Co-Signer
When you apply for an auto loan with a co-signer you could get a better interest rate. This is because you share the responsibility for the loan with another party. If you ask somebody to co-sign on the loan with you and they have a great score, you’re seen as a candidate with a lower risk.
Choosing a Different Car
Many people are surprised to learn that the auto loan interest rates on used cars are higher than the interest rates for new cars. If you’re stuck deciding if you should buy a new or used car, the APR could be the thing that tips the scales. You might also consider a used car with lower mileage.
Use an Auto Loan Calculator
Before you seek approval or pre-approval from an auto lender, use an auto loan calculator on the lender’s website to get an idea of the interest rate you can expect. You’ll likely need to know the value of the car, the down payment you’d like to make, and the loan term you want. You can look at auto loan rates without applying, so long as you already know your approximate credit score.
Where Can You Get the Best Car Loan Interest Rates?
If you want to ensure that you find a loan with excellent interest rates, you should know where to look. Many people start at the dealership, which isn’t a bad choice. Dealerships are one-stop shops for buying cars, and they make the process easy.
The bank is another good option, especially if you already have an account. Your bank may offer auto loans for used and new vehicles, and you can get pre-approval for your auto loan before you even visit a dealership. Your bank may offer a great interest rate because of your history there, which can make the car-buying process easier.
You might also check with a local credit union to get financing for a new car if you’re already a member. The process for applying for an auto loan through your credit union may be much simpler if you don’t have a bank account already. Credit unions often offer better rates than other institutions as well.
Finally, you can also check out online lending marketplaces that offer a wide variety of auto loan options and interest rates. If you have a lower credit score, you may find that this is the easiest way to receive approval for an auto loan. The difference is that you could face an interest rate that’s higher than average.
You’ll find that it’s a better idea to check with multiple lenders to ensure that you truly do get the best rate on your auto loan. While it may seem strange, applying for a loan with the same credit score and history can occasionally yield different results, including an improved APR.
Are Interest Rates the Most Important Factor to Consider?
When you choose an auto loan, you’ll want to look at more than just your interest rate and lender. You’ll also want to see how much you can expect to pay over the full term of the loan. Take some time to examine the repayment terms to see where you can get some flexibility. You should also ensure that your payments are in line with your income and other bills so you can maintain a great credit score.
Interest rates do change with time, so it’s probably worth it to keep up with the changes if you are thinking about buying a car in the near future. As you watch auto loan interest rates, keep an eye on your credit to ensure that you’re eligible for the loan you want.
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.