Automotive loan rates change often, usually in response to market conditions. Things from changes in the number of loans issued by a single lender all the way up to how the Federal Reserve has changed bank interest rates can affect auto loan rates. Most loans, however, change the most according to the consumer’s qualifications and needs. Which means that you, as the buyer, have more control over your loan rate than you might think.
Current auto interest rates range from 2.3 percent to nearly 15 percent for most buyers. What annual percentage rate (APR) is offered will depend largely on your credit score (credit worthiness), whether the vehicle is new or used, how much is being financed, and how long the loan is contracted for. But the APR is not the only consideration in a car loan, since a higher rate over a shorter period of time can actually mean paying less in interest overall than a longer loan at a lower rate.
Here we’ll explain how rates are determined, how to get an average rate expectation based on your credit score range, how to possibly get better rates, and what to look for in a loan provider. Then we’ll wrap up with a look at how to find the best auto loan rates.
Don't settle for dealer financing, get loan quotes from multiple providers
Your credit score is the single most important factor in deciding your auto loan rate. This works conversely: The higher your credit score is, the lower your APR will be and the lower your credit score, the higher your APR. Most lenders consider a credit score above 780 to be “excellent” and then have a sliding scale for scores below that ranking.
The rest of the determination for your auto loan rate is based on your income, what type of employment you have (salary, hourly, contracted, self-employed), and the type and age of the vehicle you’re looking to purchase. The steadier your income and the newer the vehicle, the lower the rate.
Any interest rate under about four percent is considered very good in today’s new car market. Anything below 6 percent is very good for a used car purchase. The table below shows average interest rates by credit score. If you know your credit score, or at least its average among the three credit bureaus, you can get an idea of what you can expect here.
|Credit Score||Avg New Car APR||Avg Used Car APR|
With each credit range, it’s clear that the annual percentage rate changes in a big way. Some lenders will give leeway for scores very close to the next tier and these groups are not necessarily absolute for every auto loan calculator. A loan broker or aggregator can probably find a better rate by looking at several lenders versus a single lender. But the loan broker will have a fee attached whereas the lender will not.
The rates available make a huge difference in the cost of the overall loan. Most car loans are 60 months (5 years) in length. Using that, we can determine that for the same loan amount (say $30,000), those in the high credit score categories pay far less than those in the lower score tiers. Here’s how that breaks down:
|Credit Range||Avg APR||Interest Paid Over Time|
Quotes based on an auto loan for $30,000, 5 years in length.
There's thousands of dollars in difference between most of these credit tiers. But don’t fret, even if you are not sure you can get a lower car loan rate, there are ways to reduce it.
Your credit score is a summary of your overall credit history. Scores are calculated differently by different lenders or credit bureaus and can change according to the type of loan you are applying for. The overall score comes from your purchase history with every loan you’ve taken, from credit cards and lines of credit to personal loans and home mortgages. Your payment history on those loans determines your likelihood of paying it back, but so does your total debt versus your available credit compared to your income.
Your payment history, especially on big ticket purchases such as automobiles or homes, will matter more to the lender for a potential auto loan than your credit card history. If you’ve steadily made payments without any hiccups for the past 5-10 years, you likely have a good credit score. If, however, your total available credit is $40,000 (between credit cards and lines of credit) and you’re utilizing more than half of that, you are likely considered more at risk of default on your payments.
Knowing these things, it’s clear that having a good payment history and lowering your overall amount owed on revolving credit will greatly improve your credit score. The next step is to reduce or remove those items that are negatively affecting your score, such as older late payment notices or open loans that have been paid. This can be done by contesting those entries on your credit reports. Lenders have a set amount of time (usually 30 days) to respond to these requests and often will ignore them if the information is old or will update if the loan is closed and they have yet to report that. Either option improves your overall score.
Other options for improving your auto loan APR is to have a large down payment (at least 10 percent of the loan) and/or have a cosigner with better credit to help back up your likelihood of payment. A cosigner is someone who agrees to be responsible for the loan should you default. It’s not uncommon for parents, grandparents, siblings, or good friends to take on this responsibility for those struggling to improve their credit or who are new to using credit.
Your goal in finding an auto loan provider is to find the right balance between excellent APR, a good reputation for honesty, and availability. Various lenders will have specific requirements for applicants for a loan and the interest rate advertised is rarely the interest rate given on the actual loan. So seeing an ad for “an APR of 1.99%” will come with an asterisk and fine print detailing that not everyone (sometimes almost no one) will qualify for that extra-low rate.
Bearing that in mind, a lender you can work with directly is better than one that is not available despite their really low rate offering. Some lenders will loan the money and then immediately sell the contract to a nameless, faceless investment firm or loan consolidator who may then be unavailable for any type of customer service needs. So it pays to know who you’re working with.
The best beginning for finding good rates is to speak with a credit union manager or financial advisor. Most credit unions offer financial advice such as auto loan needs for free and can help you through the process of nailing down your budget for a vehicle purchase and what you can expect as an interest rate. Some may even have low APR loans available.
Auto loan brokers are another good source of finding a loan. Brokers charge a fee, usually lumped into the loan itself, but only do one credit check to look at rates from a long list of potential lenders. This could save your credit score from dropping due to multiple credit checks and saves you the legwork of going lender-by-lender to find the best rate. Many brokers, such as Auto Approve, myautoloan.com, and Auto Credit Express are up-front about their fee structure and can find loans even for those with little or no credit.
Read more on the Best Auto Loans in the industry today.
Don't settle for dealer financing, get loan quotes from multiple providers
Any rate under 4 percent for a new car purchase or under 6 percent for a used car purchase is considered good in today’s market.
Yes, that is a very good percentage rate.
The average is about 3.49% at today’s market rates.
Yes, that is a very good rate for someone whose credit score is not quite perfect.