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Shopping around for car loans is one of the best ways to find a good deal. But once you have a few offers in hand, how will you know whether your quoted interest rates are high? Knowing how your rate compares to others can be helpful. With this information, you'll get an idea of what rate to expect when reviewing loan offers. Here's where to start.
What Is the Average Auto Loan Interest Rate?
Average auto loan rates can vary based on several factors, such as whether you're buying a new or used vehicle. Loans for new cars had an average 6.84% annual percentage rate (APR) in the second quarter (Q2) of 2024, versus 12.01% for used cars, according to Experian's State of the Automotive Finance Market report.
Creditworthiness also plays a role in the rate you receive. Borrowers with strong credit usually qualify for lower interest rates, while people with low credit scores may receive higher rates.
But interest rates are relative. Generally, a high interest rate is one that's significantly above the national average for a buyer who fits your profile and is looking for a similar loan type. For instance, a person who wants to finance a used car and has a low credit score shouldn't compare their rate to someone who's buying a new car and has excellent credit.
Here are the average interest rates for borrowers based on credit score range and type of car loan they're taking on.
| Average Interest Rates by Credit Score Range | ||
|---|---|---|
| Credit Score Range | New Car | Used Car |
| Superprime (781 - 850) | 5.25% | 7.13% |
| Prime (661 - 780) | 6.87% | 9.36% |
| Near prime (601 - 660) | 9.83% | 13.92% |
| Subprime (501 - 600) | 13.18% | 18.86% |
| Deep subprime (300 - 500) | 15.77% | 21.55% |
Source: Experian data as of Q2 2024; VantageScore® 4.0 used
Factors That Influence Car Loan Interest Rates
Here are some factors that go into determining a car loan interest rate:
Credit Score
Your credit score is the most influential factor in determining whether you qualify for a loan and the interest rate you receive. Borrowers with good to excellent credit—generally, a score of 670 to 850—usually receive the best interest rates. Lenders see these borrowers as more likely to make all of their monthly payments on time and pay off the loan as agreed.
On the other hand, fair credit borrowers may receive higher-than-average interest rates. Their credit scores may indicate they're less likely to repay their debt as agreed. And borrowers with poor credit may receive the highest rates because they're at a higher risk of defaulting. Lenders make up for the risk by raising interest rates.
New vs. Used Car
Loans for new cars typically come with lower interest rates compared to loans for used cars. That's because it's harder to accurately estimate the value of a used car and whether there's demand for it on the market. The uncertainty may make it difficult for a lender to sell the car and recoup its costs if the borrower falls behind on payments. Used cars are also less reliable and more likely to break down, raising the potential for default. The increased interest rate helps offset these risks.
Loan Term Length
Shorter-term auto loans, generally loans up to 60 months, tend to have lower interest rates than longer-term loans. That's because there's less risk you'll default on the loan during a shorter time frame. Longer-term loans come with a higher chance you'll fall behind on payments, so lenders compensate for that risk by charging higher rates.
Down Payment
A down payment on a car is the amount you pay upfront when taking out a loan. Making a larger down payment shrinks the amount you borrow, which lowers your monthly payments and your interest costs. It also helps reduce your interest rate because you're borrowing less. All of these factors lower the lender's risk, resulting in lower rates.
Learn more >> What's the Average Length of a Car Loan?
How to Lower Your Car Loan Interest Rate
If you're in the market for an auto loan, there are ways you can try to lower your interest rate and save money.
Raise Your Credit Score
You don't need a perfect credit score to get a great interest rate. Lenders assign similar rates to borrowers who are in the same credit score band, such as 661 to 780. Taking steps to improve your credit could help you boost your score and get you into the next-highest range, earning you a better interest rate.
Shop Around
Every lender has a different way of setting rates, so it's a good idea to get quotes from multiple lenders. For instance, reach out to large banks, community banks, credit unions and online lenders. Check features like interest rate, fees and monthly payments before making your decision.
Increase Your Down Payment
You can typically choose your down payment amount as long as it meets the lender's minimum criteria. As a rule of thumb, try making a 20% down payment on new cars and 10% on used vehicles to save on the loan over time.
Choose a Shorter Loan Term
Auto loan terms usually range from 36 to 72 months, though some of them stretch out to 85 months or longer. Shorter loan terms come with higher monthly payments, but they may also have lower interest rates. If you want to lower your car loan interest rate, choose the shortest loan term where the payment fits within your monthly budget.
Learn more >> How to Get the Best Car Loan
The Bottom Line
The interest rate on your car loan affects your monthly payment and overall interest costs. The rate you receive depends on the type of car you get and your financial profile. Generally, having a sizable down payment, choosing a shorter loan term and shopping around for quotes may help you get a lower interest rate.
It also pays to have strong credit. Reviewing your credit reports and improving your credit score can help you get there, so you can qualify for the best rates and save money.