Your auto loan interest rate is one of two key components that has the most impact on your total costs over the length of the loan, along with its term. Understanding how auto loan interest rates work can help you differentiate between a good offer and one where you may find a better opportunity with more searching.
What Is the Average Auto Loan Interest Rate?
While the details of your requested auto loan can have a significant impact on the auto loan interest rates available to you, national averages also play a part in determining the rate you earn. According to an assessment by Experian, the average auto loan interest rate on a new vehicle in the first quarter of 2020 ranges from 3.65% for super prime credit applicants to 14.39% for deep subprime applicants. Used vehicle rates range from 4.29% to 20.45% respectively.
Key Factors in Setting an Auto Loan Interest Rate
There are many important factors that can raise or lower the interest rate offered by a lender when you seek an auto loan. Important factors include:
- Loan size: The amount of money you request when seeking an auto loan is important, not only for setting your initial debt but also for determining the interest rate you receive. The larger a loan is, while maintaining all other variables, the higher the interest rate a lender will probably offer.
- Loan term: Similarly to loan size, your loan term is important, not only for setting how long you pay for your vehicle, but also for the interest rate on your loan. Short-term loans often have improved financing rates, and you may be able to lower the rate on your auto loan by accepting a shorter term.
- Your lending source: Different lenders might offer significantly different financing opportunities to the same applicant. By considering multiple options, you can compare your offers to identify the financing agreement that best matches your finances and needs.
- Your credit score: A credit score is an assessment of a potential borrower’s perceived financial stability, and it moves up and down in accordance with your record of maintaining your credit accounts. Applicants with a higher credit score commonly receive improved financing rates because of their perceived safety as a borrowing option, which lowers the profit margin a financier requires to approve an agreement.
- Your income level: An applicant’s income is another key consideration a lender may use when determining whether to offer a line of credit to purchase a new or used vehicle. Higher income relative to the size of the loan commonly results in a lower interest rate, because a lender determines you are a safer option for a loan offer.
- Special offers: Many lending companies or auto dealerships offer financing specials to encourage potential borrowers to choose them. These special offers may allow you to receive financing rates that might be better than you’d expect when considering other key factors, helping you get the best deal.
- Buying new or used: While the process of buying a new or used car can often be quite similar, your financing opportunities are likely to differ based on whether you purchase a new or used vehicle. Buying a new vehicle generally provides more favorable interest rates.
- The current market: Although many factors related to your financing offer depend on you, there are also larger considerations that affect the rates a company offers. As the federal borrowing rates change, offers from lenders commonly change accordingly, meaning you can benefit by making a purchase during a period of low interest rates.
- Your location: Where you shop for your new or used car may also affect the financing opportunities available to you. Similar to how federal borrowing rates are outside your control but can have a significant impact on your cost, where you shop and borrow may also impact your rate.
Tips for Lowering Your Auto Loan Interest Rate
If you’re preparing to make a new or used car purchase using an auto loan, keep these tips in mind to get the best interest rate:
- Make a bigger down payment: Lowering the size of your loan can also lower the interest rate on your financing agreement. By saving for a larger down payment, you reduce the amount of your loan to decrease your rate.
- Trade in your vehicle: Just as making a larger cash down payment with your purchase can decrease the size of your loan and lower your borrowing rate, trading in a vehicle is another excellent option. By reducing the size of your loan, you may improve the rates available to you.
- Find a less expensive vehicle: One way to reduce the size of your loan by a large amount is to choose a more affordable vehicle. As with a larger down payment or trade-in, this reduces the size of your loan to make you a safer borrower and improve your auto loan interest rate.
- Ask for a cosigner: If you have no credit or poor credit, finding a cosigner may be the best way to lower your rate. A cosigner takes joint responsibility for the repayment of the loan, allowing someone with a higher score to vouch for your loan so you benefit from their improved score or finances.
- Explore your options: Shopping for multiple financing offers allows you to compare auto loan interest rates offered by each lender. This helps you find the borrowing opportunity that’s most beneficial to you.
- Work on your credit score: Raising your credit score is often one of the most effective ways to lower your interest rates. Focus on making your monthly payments and paying down credit cards to raise your reliability and lower your credit usage.
If you’re in the market for your next car purchase, these tips for improving your interest rate offers, combined with your new knowledge of the average auto loan interest rate, can help you secure the best possible deal. When you know what to expect and how to increase your chances of a favorable offer, you can shop with confidence.
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.