If you ever find yourself shopping for a new car, one of your considerations is likely going to be how you’ll pay for it. If you’re thinking of auto financing, this post is going to interest you.
The annual percentage rate, or APR, can vary, so it pays to learn as much as you can. Then you’re more likely to score a better deal and save money in the long run.
What’s the Average Interest Rate for an Auto Loan?
The average auto loan interest rate will look very different, depending on which borrower you’re looking at. Your credit score also makes a big difference. Experian, a credit reporting company, collects data on auto loan interest rates and then calculates averages for new and used-vehicle purchases across five credit levels.
Here are a couple of tables with their findings for average interest rates borrowers paid in the fourth quarter of 2022.
|Credit score range||Average interest rate for new car loans|
|300 – 500||13.42%|
|501 – 600||10.79%|
|601 – 660||8.12%|
|661 – 780||5.82%|
|780 – 850||4.75%|
|Credit score range||Average interest rate for used car loans|
|300 – 500||20.62%|
|501 – 600||17.46%|
|601 – 660||12.08%|
|661 – 780||7.83%|
|780 – 850||5.99%|
What Factors Affect Auto Loan Interest Rates?
Several factors influence the interest rate you pay on an auto loan. They include the following:
- Your credit score and history: The better your credit score, the lower the interest rate you pay whatever type of loan you take out. However, for car loans, your credit score makes a massive difference. As you can see from the tables above, the highest credit scores pay as much as 14% less interest.
- Buying a new vs. used car: New car purchases are less expensive to finance than used cars, thanks to higher resale values and manufacturer incentives. On average, used car financing is between 1.24% and 7.2% more expensive than new car financing.
- Length of the loan: Longer loan terms typically have higher interest rates. This is because they’re considered higher risk.
- The make, model, and year of the car you’re buying: Some cars have a better resale value and this plays an important part.
- How big your down payment is: The size of your down payment influences your car’s loan-to-value ratio. You can calculate this figure by dividing the amount you owe on the loan by the value of the car, after depreciation.
How to Get the Best Interest Rate on a Car Loan
Buying a new or used vehicle can be a massive expense, even if you’re using a loan to finance the purchase. If you want to get the lowest monthly payment, you should seek out the lowest interest rate possible.
Here are some suggestions to help you get the best interest rate on your next auto loan.
Improve Your Credit
As you’ve already seen, your credit score impacts your loan terms significantly. Generally, if your credit is excellent, you’ll qualify for the lowest interest rates. Conversely, if your credit score is poor, you’ll end up paying much higher interest rates.
One of the most effective ways of securing a low-interest rate is to improve your credit score. You can do this by paying bills on time, paying off outstanding debt, and monitoring your credit utilization ratio.
Get Pre Approved
Getting preapproved for a loan is another good idea if you want to secure the best interest rate. Get letters of preapproval from a few lenders before you start car shopping.
Pre approval shows how much money you can borrow and the interest rate you can expect to pay. When you’ve got multiple pre approval letters you can compare and pick the most favorable loan terms and the best interest rate.
Purchase a New Car
New cars are usually more expensive to buy compared to used cars, but lenders tend to offer better interest rates on new car loans.
You might be lucky enough to find an interest-free loan for a new car, especially if your credit score is excellent. However, remember that a low-interest rate doesn’t necessarily mean your new car loan will be more affordable overall.
Get a Co-Signer
When you get a co-signer for your loan, it means they’re agreeing to take over your debt should you default on your payments. A co-signer is not always necessary, but it can help you secure a lower interest rate, especially if you have bad credit.
Students or people with no credit history will most likely require a cosigner if they want an auto loan.
It’s best if your co-signer has good credit and a favorable borrowing history as this may help you get a low interest rate.
You should spend time researching different lenders and not go with the first one you come across. They might not be the best and there are lots of lenders to choose from. Banks, credit unions, and online lenders all use different criteria for setting interest rates.
When Refinancing Your Auto Loan Might be an Option
One other way of potentially getting a better interest rate is with refinancing. When you refinance, you replace your current car loan with a new one.
Typically, the new loan will have a lower interest rate or a longer period of repayment.
Refinancing a car loan can be a smart thing to do in the following situations:
- Your credit score has improved
- You can afford your current payments
- Interest rates have gone down
Now you know a little more about car loan interest rates, you’re better equipped to find the best deal for your next car purchase.
What is a good interest rate for a car for 72 months?
An interest rate that’s below 4.07% for a new car and below 8.62% for a used car, is generally considered a good interest rate for a 72-month car loan.
What is a good interest rate for a car loan?
A good interest rate for a car loan is whatever the lowest one is that you can get. Interest rates vary considerably. They depend on your credit score and several other factors.