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Car loan interest rates
Know how rates work and compare lenders to find the best deal.
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Interest rate is one of the most important factors that impacts how much you pay for a new or used car. Generally, you need strong personal finances to qualify for the most competitive rates — especially a good credit score. However, it’s not the only number to keep in mind.
What’s the average interest rate for a car loan?
The average interest rate on a new car loan is 5.15% as of September 2020. Your rate will depend on your credit score, debt-to-income (DTI) ratio and whether you’re buying a new or used car.
| Credit score | Average new car rate | Average used car rate |
|---|---|---|
| Excellent (super prime): 781 to 850 | 2.51% | 3.84% |
| Very good (prime): 661 to 780 | 3.61% | 5.72% |
| Good (near prime): 601 to 660 | 6.51% | 10.13% |
| Fair (subprime): 501 to 600 | 10.36% | 16.4% |
| Poor (deep subprime): 300 to 500 | 14.01% | 20.24% |
Source: Experian’s State of the Automotive Finance Market Report — Q3 2020
Why do new and used car loans have different rates?
Some lenders charge higher rates for used cars because you can’t take advantage of manufacturer deals and it’s difficult to determine the actual value. Used car buyers also default at a higher rate, causing some lenders to slap in a higher APR.
LEARN MORE: How to decide between a new vs. used car
Interest rate by loan term
The interest rate you get can also depend on your car’s loan term, though not always. In fact, the average interest rate on both a 48- and 60-month car loan from a commercial bank in the third quarter of 2019 was 5.27%, according to the Federal Reserve.
While some lenders may charge lower rates for a longer term, others like credit unions offer higher rates on longer terms.
8 tips to get the best rate on your car loan
Finding the best car loan interest rate involves preparing and plenty of research beforehand with a potential to save thousands of dollars. These tips should get you started on your journey to scoring a low rate on your next car loan.
- Know your credit score. By knowing your credit score before you shop for a loan, you’ll know what kind of rate you can expect. This allows you to go into the car-buying process with your eyes open and a realistic goal in mind.
- Compare rates from different lenders. Applying for multiple loans around the same time won’t hurt your credit, so you can apply for preapproval from multiple lenders without damaging your overall score. This makes it easier to compare rates and find a loan suitable for your needs.
- Get preapproved before visiting the dealership. When you compare your loans ahead of time, you can be preapproved — giving you the upper hand when negotiating with a salesperson.
- Look out for discounts. Dealerships often offer rebates and reduced rates on certain vehicles while lenders might offer loyalty discounts and rate reductions for using autopay.
- Focus on the overall cost. Rather than focus on the monthly payment, concentrate on the sale price and the price you’ll end up paying at the end of your loan. Once you have this number, it’s much easier to determine what loan term is best so you can handle the monthly payments.
- Be willing to negotiate. No matter how good your credit score is, you likely won’t be offered the lowest interest rate right off the bat. Dealerships are hoping you don’t question your rate, so come prepared knowing your credit score and the average rate you can get.
- Don’t jump on the first deal. Since your interest rate isn’t the only thing that impacts the final price of your car, spend the time determining how term length and vehicle cost change your budget. Most lenders offer a few days to decide on a loan and buy a car — you won’t be wasting time if you decide to take a moment to get your thoughts in order.
- Check the fine print. Like most loans, car loans are notorious for their legalese. Understand how your interest is calculated and any potential fees you might be charged. You’ll also want to confirm that your loan isn’t conditional when you visit a dealer. Conditional means “subject to change,” so your loan isn’t finalized when you drive off the lot. If your terms change, you could be left with a worse interest rate on your loan.
- Apply with a cosigner. A cosigner not only lowers the risk for the lender, but it can result in a lower rate for you because your lender will consider the credit and income of both parties when reviewing your application, giving you a better chance of approval for a more affordable rate.
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How do lenders come up with my rate?
Lenders don’t just rely on your credit when they decide your interest rate. The more well-rounded your application, the better your chances of scoring a lower rate. Although there are other factors that may play a role, these are the four main points lenders consider when reviewing your application:
- Credit score. Those with higher scores generally have access to lower rates, so improving your credit history is an important part of getting a low rate on your car loan.
- Income. Lenders consider your income because it reflects your ability to pay back the loan. They’ll also want to see a low debt-to-income ratio to make sure you can afford your loan.
- Loan term. The loan term impacts your interest. Typically, shorter terms of 36 and 48though you probably won’t get the lowest rate available.months have lower interest rates, but your monthly payments are higher.
- Vehicle. Your vehicle’s make and model also plays a role in your interest rate, especially if you’re buying a used car. Since it’s likely your car will be used as collateral for the loan, lenders often charge higher interest for cars that are likely to break down.
Where can I find a car loan with competitive interest rates?
Comparing the rates at different banks, credit unions and online lenders is critical to finding the lowest one out there.
- Banks. Consider looking at your bank — they often offer loyalty discounts that can knock down your interest.
- Credit unions. Since you have an established banking relationship already, it might be easier to get approved, even if you don’t have the best credit. These lenders tend to offer the most competitive rates.
- Online lenders. Some online lenders help borrowers with poor credit find a loan if they can’t qualify at their bank — though you probably won’t get the lowest rate available.
- Dealerships. Local dealerships often work with all credit ranges, but they sometimes inflate the interest rate to make a profit.
Dealer financing vs. car loan rates
Dealership financing are often be more expensive than borrowing from a third-party lender. But there are some situations where you can get a better deal.
- When it offers 0% financing. Some dealerships offer financing as low as 0% — especially if they want to move certain models out of the lot.
- When you have a preapproved loan. You can use your preapproved loan from another lender as leverage to get a better rate at the dealership.
- When you want to negotiate. Even if you aren’t preapproved, dealerships are often flexible about rates and terms on their loans, unlike other car loan providers.
Can I really get a car loan with a 0% APR?
It’s possible, but it depends on your credit and the lender. Often, you’ll need nearly perfect credit to qualify, and it’s usually only available for certain makes and models. Agreeing to a 0% APR auto loan may also mean foregoing other offers or promotions, like say a manufacturer’s rebate. Ultimately, if you qualify, you’ll want to crunch the numbers to make sure it’s the best deal for you.
LEARN MORE: What dealerships don’t want you to know about 0% car loans
Bottom line
At the end of the day, you can lower the total price you pay for a new or used vehicle by ensuring you’ve found a good deal on your car loan interest rate. When shopping for a new car loan, don’t forget to do your research on each part of the process. If you already have a car loan with a high interest rate and think you could qualify for a lower one, you may want to consider refinancing.
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