You may be looking at financing options if you’re in the market for a new or used vehicle. You can apply for a vehicle loan through your local bank or credit union, or the dealership often has relationships with lenders for financing. Online marketplaces are another way to find funding for your vehicle loan. As you start looking at loans, you might ask yourself, “What is a good car loan rate?”
What Is a Vehicle Loan?
Most people don’t have the cash to purchase a vehicle outright, so they finance the vehicle through a loan. You borrow money from a lending institution with the agreement that you will pay it back to them via monthly payments with a set amount of interest added for a certain length of time. For example, you may ask to borrow $25,000 for your vehicle, and the lender offers you a loan for 60 months at 4.5% interest. That means that you’ll pay the lender $2,964.53 in interest.
Several factors affect the terms of your loan, such as the annual percentage rate (APR), including:
- Your credit history
- Your income
- Amount financed
- Length of term
- Age of vehicle
- Type of vehicle
- Down payment
Generally speaking, the better your credit score is, the lower the APR you’ll be offered. Other factors can affect the length of term you’re provided for a loan, such as:
- Amount financed
- Age of vehicle
- Mileage of vehicle
Many lenders won’t finance vehicles over 125,000 miles or over 10 years old. These limitations are important to know before you start shopping for a vehicle. If you find a vehicle over in mileage or age, you might be able to secure a personal loan, but that would have a much higher interest rate than a vehicle loan.
Know Your Credit History and Score
Your credit history and score is the most crucial factor in determining the APR for a vehicle loan, so you should know yours before looking for a vehicle. You can get a free copy of your credit report from the three major credit bureaus once a year for free. These bureaus are:
You can request your copy at AnnualCreditReport.com or by calling 877-322-8228. It’s important to note that these three bureaus provide a copy of your credit history, which does not usually contain a credit score. You also don’t have just one credit score, as the score represents your overall credit risk. Companies like FICO use various models for credit scoring to calculate your credit score. The higher your credit score, the lower the perceived risk that you’ll default on the loan.
Many credit card companies and banks have started offering credit scores on your monthly statements or mobile apps. You can also purchase a copy of your credit scores from the three credit bureaus or FICO. Other credit score services are available to monitor your credit and provide your credit score for a monthly subscription fee.
Research Various Loan Offers
Take the time to research several lenders and compare the details of each loan offer. Some lenders include origination fees or prepayment penalties, and each offer will likely come with an APR and loan length. Before starting your research and pre-qualification process, you may want to look at what you can expect for average vehicle loan terms, such as APR and loan length, based on what you’re looking to borrow.
If you have a vehicle in mind, you can even run a loan calculator simulation to determine your monthly payments. Knowing what you can expect to pay each month will help determine the maximum amount you can borrow. You don’t want to take on a bigger loan payment than you can handle because you could have your vehicle repossessed if you default on your payments.
Average Car Loan Interest Rates
Each lender sets its own APR for vehicle loans. According to NerdWallet, the average APR for new and used vehicles based on credit scores is as follows:
- Superprime (781-850): 2.4% for new, 3.71% for used
- Prime (661-780): 2.56% for new, 5.58% for used
- Nonprime (601-660): 6.7% for new, 10.48% for used
- Subprime (501-600): 10.87% for new, 17.29% for used
- Deep subprime (300-500): 14.76% for new, 20.99% for used
For the first quarter of 2022, Experian’s State of the Automotive Finance Market report shares that the average APR for new cars is 4.07%, with an average APR of 8.62% for used cars. Credit scores over 781 can get APRs under 3% on new vehicles, while those under 501 should expect an APR offer of over 10% on new vehicles.
What Is a Good Car Loan Rate?
As you can see, many factors determine the APR on a car loan, and what a good car loan rate is to one person may not be to another. To determine a good car loan rate for you, you need to consider your credit score. If you have a prime credit score of 700, a good car loan rate should fall between 3% to 6% for new vehicles and 5% to 9% for used vehicles. You’ll want to find a different lender if you’re offered an APR over 10% on a used vehicle with a prime credit score.
How Can You Improve Your Credit Score?
Your credit score is a significant factor in determining interest rates on any loan, so improving your credit score will help you procure lower interest rates on car loans, home loans, and more. To improve your credit score, you should:
- Pay your bills on time
- Pay down revolving credit
- Try to utilize 30% or less of your available credit
- Limit hard inquiry credit checks
- Consolidate debt
- Deal with any delinquencies
Improving your credit score will help you obtain a good car loan rate.
Knowing your credit score before you go car shopping can help ensure that you receive a reasonable APR offer on a credit application. Furthermore, knowing in advance what the average APR offers for your credit score will help you even more. Before you hit the dealerships, research to determine what a good car loan rate is for you.
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.