Know what rates to expect to find the best deal on your next auto loan.
What is the average interest rate for car loans?
As of August 2018, the average interest rate for a 60-month car loan is around 9.95%.
The rate you can expect on a car loan depends on a number of factors, but many lenders put the most weight on your credit score. Those who have excellent credit typically enjoy lower interest rates, with the average APR coming in at around 4.27% for a 60-month new car loan.
For people with less-than-perfect credit, the number can get much higher. If you have good to fair credit, your interest rate may range from 5.64% to 10.68%, with higher scores receiving lower rates. Unfortunately, those with poor credit tend to have the poorest rates — with APRs topping off at over 16%.
Compare your car loan options
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. We’d recommend beginning your search with the bank or credit union you do business with. Since you have an established banking relationship already, it may be easier to get your application approved, even if you don’t have the best credit. Many banks and credit unions also extend loans to nonmembers, so even if you think you may be able to find a better interest rate elsewhere, there’s no harm in applying.
You may also want to check out some online lenders to see if you meet their qualifications. Some can help borrowers with poor credit find a loan they might not otherwise qualify for. If you haven’t found a traditional lender willing to consider your application, an online lender may be a good option — though you probably won’t get the lowest rate available. Local dealerships could work with you no matter your credit range, but they tend to inflate the interest rate to make a profit.
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.
1. Know your credit score
Before you start comparing loans, understand your credit report and how it impacts your finances. If you have multiple accounts open and have a high debt-to-income ratio, your application looks less favorable to lenders. On the other hand, if you have a clean record and an excellent score, you’ll want to know how low your rate can get — usually less than 5.5% for a new vehicle. Go into the car-buying process with your eyes open and a realistic goal in mind.
2. Compare rates from different lenders
Applying for multiple loans around the same time isn’t likely to hurt your credit since multiple inquiries for the same type of loan are generally shown as one inquiry on your credit report. This means you can apply for preapproval from multiple lenders without committing and damaging your overall score. This makes it easier to compare rates and find a loan suitable for your needs.
3. Get preapproved before visiting the dealer
When you compare your loans ahead of time, you could be preapproved at a low interest rate. This means you’ll have a tool to negotiate a low APR once you choose your next car.
4. Focus on the overall cost
Many buyers visit the dealer with an idea of how much they can pay each month. While this is great for your budget, it can lead to salespeople inflating the price of your car, usually by offering you a longer loan term — which equals paying more in interest. Your focus should be on the overall cost of the vehicle, that is, 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 term length is best so you can handle the monthly payments.
5. Be willing to negotiate
If you decide to visit a car dealership without a preapproval, you’ll need to negotiate your interest and the price of the car. 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.
6. Don’t jump on the first deal
After researching, price shopping and comparing lenders, it might be tempting to take the first good interest rate that comes your way. Stay patient. 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.
7. Check the fine print
Like most loans, car loans are notorious for their legalese. You should know how your interest is calculated and any potential fees. 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. Your terms can change, which could leave you with a worse interest rate on a loan you thought you’d got a good deal on.
8. Apply with a cosigner
Lenders prefer poor-credit applicants apply with a cosigner because they act as a guarantee for the loan — if you’re unable to repay, your cosigner is responsible. This not only lowers the risk for the lender, but it can result in a lower rate for you.
Even applicants with decent credit can benefit from a cosigner or joint application. The lender considers the credit and income of both parties when reviewing your application, giving you a better chance of approval for a more affordable rate. Because of this, your cosigner has to meet or exceed the lender’s eligibility criteria.
How is my interest rate determined?
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 low rate. Although there are other factors that may play a role in your interest rate, 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.
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 auto refinancing.
