How to Find the Interest Rate on Your Car Loan

How Does Interest Work on a Car Loan?

As with any loan, the interest on a car loan is the cost of borrowing money to buy the car. The interest is calculated as a percentage of the loan amount and is spread out over the life of your loan. Lenders determine your interest rate by considering various factors like your credit score, income, repayment term and loan amount.

Most auto loans use simple interest, which is calculated based on your remaining principal balance each month—not your original loan amount. As you make payments and reduce the principal, your interest charges also decrease and more of your payment goes toward paying off the loan. This process, known as amortization, allows you to save money by making extra payments early in the loan term.

How to Figure Out Your Car Loan Interest Rate

If you're not sure what interest rate you're paying on your auto loan, here's how to find out:

• Check your loan documents. Lenders are bound by the Truth in Lending Act (TILA) to inform you of specific loan information, including your interest rate. Refer to your original loan documents to find details about your interest rate, term and payment amount.
• Log in to your account online or lender's app. You may find a digital copy of your loan documents in your account dashboard or app, which includes your interest rate details.
• Review your monthly billing statement. Whether you receive your bill online or through the mail, your statement includes key details about your loan, including your interest rate, remaining balance and due date.
• Contact your lender. A quick call to your lender is all it takes to verify your interest rate and answer any other questions you have about your financing.

Understanding your car loan's interest rate can help you determine whether you need to refinance, make extra payments or simply stay the course to save money on your overall loan costs.

How Do I Calculate APR on a Car Loan?

Your APR is a more accurate figure for determining your total borrowing costs because it includes both your interest rate and lender fees. Calculating the annual percentage rate (APR) yourself takes a little longer than using an APR calculator, but it's always good to understand how your total loan costs are determined.

1. Look Up Your Loan Details

You'll need to gather some important loan information before you can calculate your APR, including:

• Interest: The total interest owed over the loan term. Convert this number to a decimal. For example, an 8% interest rate would be .08.
• Fees: This includes any origination fees and any other lender charges you pay upfront.
• Taxes: If you're including state or local sales taxes in your loan, add them to your total. If you're paying taxes separately, you don't need to include them in the APR calculation.
• Principal: This is the original loan amount.
• Term (in days): Write down the length of your auto loan in days. For example, a five-year car loan is 1,825 days (365 days x 5).

2. Calculate Your Loan's APR

With the above information handy, you can run the following APR formula to determine your loan's rate.

With this formula, interest, fees and taxes are added together and then divided by the principal and again by the term. The resulting number is then multiplied by 365 and converted into a percentage by multiplying by 100.

Example: Let's say you borrow $30,000 for a car with a 6% interest rate over a five-year term.

1. Determine interest charges: Multiply $30,000 by 0.06 and then 5 (years), giving you interest charges of $9,000.
2. Add in fees and taxes: Assume you're paying $600 in total lender fees and $1,500 in taxes—$2,100 in total fees. Interest plus fees and taxes equal $11,100 ($9,000 + $2,100).
3. Divide by the principal loan amount: $11,100 / $30,000 = 0.37.
4. Divide by the term (in days): 0.37 / 1,825 days = 0.000202739726.
5. Multiply by 365: 0.000202739726 x 365 = 0.074
6. Multiply by 100 to get a percentage: 0.074 x 100 = 7.4%. The APR for this car loan is 7.4%

This example shows how the APR is higher than the loan's interest rate and provides a more precise picture of your total borrowing costs because it incorporates your fees and taxes into the figure.

APR calculator

What Affects Car Loan Interest?

The interest rate you receive on your car loan depends on a wide range of factors, such as:

• Your lender: Interest rates vary from lender to lender due to their own risk assessment models, funding processes and other factors. That's why it pays—sometimes quite literally—to shop and compare rates from banks, credit unions and dealerships to find the best deal. You may want to get preapproved with several lenders to check your eligibility and use it as a starting point for negotiation at the dealership.
• Your credit score: Your credit score is a key factor lenders consider to get a snapshot of how well you manage debt and whether they can rely on you to make your monthly payments. Generally, the higher your credit score, the more likely you are to secure a lower interest rate. According to Experian's State of the Automotive Finance Market report, new car buyers with excellent credit scores received loans with an average interest rate of 5.08% in the third quarter (Q3) of 2024, while those with poor credit paid nearly three times as much, averaging 15.43%.
• Your debt-to-income ratio (DTI): Your DTI—the percentage of your gross monthly income that goes toward your monthly debt payments—is another indicator of your financial health. You'll typically need a DTI below 50% to get approved for a car loan, but the lower your DTI, the better your chances of getting a more competitive rate.
• Your loan term: Shorter-term car loans often come with more competitive interest rates because the lender expects to recoup their money sooner. Keep in mind, your monthly payments will be higher with a shorter loan term. You might choose a longer loan term for lower monthly payments, but that trade-off often comes with a higher interest rate. According to Experian data, the average interest rate for new car loans in Q3 of 2024 was 6.61%, while used car loan rates averaged 11.74% during the same period.

• Your loan amount: Lenders also consider the size of the loan when calculating your interest rate. A higher loan presents more risk to the lender, which could lead to a higher interest rate. Making a larger down payment will reduce the overall loan amount and potentially help you snag a lower rate.
• Your car's age: Remember, auto loans are secured by the car itself. That means the lender takes on more risk financing an older used car with a lower resale value than a new car. Consequently, older cars typically come with higher interest rates than newer cars.

Improving Your Credit Could Lower Your Auto Loan Interest Rate

Understanding the interest rate on your car loan can help you determine if you're paying more than you should. If so, look for ways to lower your rate, refinance your auto loan or make extra payments to pay off your loan sooner.

If you're considering refinancing or replacing your current car with a new one, make sure your credit is in good shape before applying for a car loan. Reviewing your credit report for free with Experian and taking steps to improve your credit may help you qualify for lower rates and save money.