Getting the best price is often an important criterion when shopping for a new or used car. In addition to price shopping, choosing a lender with the best interest rate can significantly save you money. Find out the average car loan interest rate and how you can improve your chances of qualifying for a competitive interest rate.
What Is a Car Loan Interest Rate?
Interest rates fluctuate based on lenders and the current economy. The cost is usually a percentage of the loan amount that’s paid over the life of the loan. An interest rate is listed as an annual percentage rate (APR). Borrowers may notice that interest rates vary depending on a number of factors, including:
- Credit score: Borrowers with a higher credit score typically receive lower interest rates.
- Lender: Lenders may set their own interest rates.
- Car details: Details about the car you plan on buying also affect interest rates, with used cars costing more in interest.
- Buy/refinance: Buying a new or used car comes with a higher interest rate than refinancing an existing loan.
- Federal Reserve: The Federal Reserve also sets and influences interest rates.
Considering all these factors, the average car loan interest rate significantly varies. Comparing interest rates among lenders is one of the best ways to secure a competitive rate.
What Is the Average Car Loan Interest Rate?
The average car loan interest rate is somewhere between 3.89% and 20.38%. These average rates are based primarily on the borrower’s credit score. According to information from U.S. News, the average car loan interest rates based on credit scores include the following:
- Excellent credit (750 or higher): Average APR or 7.93% for a new car and 8.18% for a used car. Refinancing an auto loan with excellent credit offers an average APR of 3.89%.
- Good credit (700-749): Average APR of 10.36% for a new car loan and 10.61% for a used car. Refinancing an auto loan with good credit offers an average APR of 4.54%.
- Fair credit (600-699): Average APR of 14.73% for a new car loan and 14.98% for a used car. Refinancing an auto loan with fair credit offers an average of 6.55%.
- Bad credit (451-599): Average APR of 20.13% for a new car loan and 20.38% for a used car. Refinancing an auto loan with bad credit offers an average of 9.20%.
This list doesn’t include subprime credit, which is poor credit. The lowest possible credit score is 300, which may go lower than the “bad credit” category. Additionally, borrowers with no credit may find it difficult to find good interest rates.
Why Shopping for Interest Rates Is Important
Shopping for interest rates is important when making a big purchase, such as a car. The average cost of a new car is more than $47,000. If you bought a car at this price with a five-year loan and 20% down, you would owe $37,600. If you have bad credit, you would be subject to an average interest rate of 20.13%, which is an additional $22,334 over the life of the loan.
If you have excellent credit when buying the same car and qualify for a 7.93% interest rate, you would pay $8,068 in interest over the life of the loan. This means that paying a higher interest rate for the same car leads to you paying $14,266 more interest, or a few hundred dollars more per month.
Once you know what interest rate you qualify for, you can use this information when car shopping. You can plug it into a calculator to learn how much your interest will add to your monthly payment and the total cost of the vehicle. You can also use this information to compare interest rates among different auto loan lenders.
How to Get a Better Interest Rate When Buying a Car
There are things that you can do to qualify for a better interest rate, including:
Improve Your Credit Score
The best way to get a lower interest rate is to improve your credit score. Pay off debt and make monthly payments on time. Credit score and Federal Reserve interest rates are the biggest influences on auto loan interest rates. You can’t control the rate set by the Federal Reserve, but you can control your credit score.
If you don’t have credit, you may also find it difficult to qualify for a good interest rate. Opening up a line of credit and paying off your balance each month can help you create a credit score that can get you a better auto interest rate.
Compare Interest Rates Among Lenders
Price shopping interest rates is also possible. You have a right to compare different lenders, including the interest rates they offer to you. As long as you apply for multiple auto loans within the same two-week time period, it won’t adversely affect your credit score.
Refinance an Existing Auto Loan
If you bought a new car at a high-interest rate, you might be able to refinance to lower your interest obligations. Even just six months of paying your high-interest loan on time can establish enough good credit history to refinance at a significantly lower rate. You may have to pay another down payment to refinance your auto loan, but sometimes the cost savings can be hundreds of dollars per month.
Use a Cosigner
Having a cosigner may also get you a better interest rate. If you have someone willing to cosign who has good credit, you may qualify for a better rate. However, your cosigner will also be financially responsible for the payments if you don’t make them.
Buy New Instead Of Used
Many lenders often offer better interest rates on new cars. Buying a new car can offer you reliable transportation, better rates, and more inventory to choose from. If possible, putting more money down on your new car purchase can also reduce your interest rate. The less you owe, the less you’ll have to pay in interest payments.
Your auto interest rate affects how much you pay for your new car monthly and in total. Improving your credit score, price shopping interest rates, and refinancing your existing loan can help you avoid costly interest payments.
Once you find a car within your budget, keeping up with routine maintenance and repairs can help keep it affordable. The FIXD sensor can help you keep track of all your vehicle repair needs.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.