While many factors play a role in the interest rates you’re offered for car loans, your credit score is the most influential. Knowing average auto loan interest rates by credit score can give you an idea of what you might qualify for and help you determine whether you’re getting a good rate on your vehicle loan.
In this article, we at the Guides Auto Team break down auto loan interest rates by credit score for new and used car loans. We also examine how auto loans work and where you can find the best auto loan rates for your credit profile.
Average car loan interest rates by credit score
Creditors group people into categories — sometimes called credit bands — based on credit-scoring models like FICO® and VantageScore. While other factors affect the auto loan interest rates you’re offered, the credit band your score falls into is among the most influential.
The following table shows the ranges of scores that define these categories, as well as the average auto loan rates for new and used car purchases for each category. This data comes from Experian’s most recent State of the Automotive Finance Market report.
How auto loans work
An auto loan is a type of secured loan that uses the car that’s being financed as collateral. When you finance a car, the lender becomes the lienholder and is the owner of the car title until you pay the loan off.
In essence, this means that while you have the legal right to possess and use the car, it’s the lender that truly owns it. If you fail to make your loan payments, the financial institution can repossess the vehicle.
When you shop for auto loans, you’ll likely see them advertised by annual percentage rate (APR). This figure includes your interest rate and the fees and other costs that come with the loan.
Before you start filling out loan applications, consider using an auto loan calculator to help you get an idea of how rates affect what you might pay. Many loan calculators allow you to enter basic information such as your desired loan amount, rate and term to see how much your monthly car payments would be and how much you’d pay in interest over the lifetime of a loan.
What factors affect auto loan rates?
Auto lenders set interest rates based in part on the likelihood of repayment. The riskier the loan is for the lender, the higher the interest rate it is likely to charge. Several factors indicate risk to lenders and can affect the interest rate you get on a loan.
Here are the most critical factors used to determine your rates:
- Credit score: Your credit score is the factor that carries the most weight. The lower your score is, the higher your interest rate is likely to be.
- Credit history: Your credit score is part of your credit history, but it isn’t all of it. Lenders look at a detailed credit report that includes information about how much of your available credit you’re using and whether you’ve missed monthly payments.
- Loan term: Car loans generally have terms ranging from 12 to 84 months. Longer terms typically translate to lower monthly payments, but they also tend to come with higher interest rates.
- Market rates: The average market rate is a significant factor in the rates you get. Lenders adjust their rates based on what they pay to borrow money, so you’ll see higher rates if the average interest rate goes up.
- Loan-to-value (LTV) ratio: The LTV ratio expresses how much of a car’s value is borrowed. For example, if you want to borrow $20,000 for a car that’s worth $40,000, that’s an LTV ratio of 50%. The lower the LTV ratio is, the lower your interest rate is likely to be.
- Down payment: Your down payment, whether in cash or in the form of a trade-in, affects the LTV ratio. You can find zero-money-down car loans, but you’ll typically get better interest rates by making a larger down payment.
- Debt-to-income (DTI) ratio: Your DTI ratio is the amount you have to pay in debt obligations every month compared to your monthly income. While your debt factors into your credit score, lenders will also look at your DTI ratio to see how much you can realistically afford to pay. The lower your ratio of debt payments to income, the lower your auto loan rates are likely to be.
- Vehicle’s age and condition: Lenders typically have age, mileage and condition restrictions for financed vehicles, and they adjust rates based on those factors. Loans for older, higher-mileage vehicles or those in bad condition come with higher interest rates.
What goes into your credit score?
Credit scores have been widely used since 1989, when FICO, which currently has the most popular scoring model, introduced its system. Credit scores are meant to tell lenders how likely you are to make your required payments on time and in full. Your FICO credit score is based on the five factors below, which are weighted differently.
- Payment history (35%): One of the most significant factors in your credit score is whether you’ve missed payments. This includes whether you’ve had accounts that were delinquent.
- Amounts owed (30%): While having debt doesn’t necessarily mean you’ll have a low credit score, using too much of your available credit can cause your score to fall.
- Length of credit history (15%): How long you’ve had accounts open with creditors affects your score. Having older accounts with long histories of regular, on-time payments will boost your credit score.
- New credit (10%): Opening a new credit account can temporarily cause your credit score to drop.
- Credit mix (10%): Having a variety of credit accounts, such as credit cards, student loans and a mortgage, improves your score.
In the graphic below, you will find some steps that may help improve your credit score and help lower your loan rates.
Where can you get the best auto loan interest rates?
Lenders don’t all offer the same auto loan interest rates by credit score. You’ll likely find a range of rates available to you if you compare auto loan offers. That’s why it’s good to shop around. There are a number of places you can find auto loans. Some may have better loan options than others, depending on your circumstances.
Most traditional banks offer new and used car loans. Many also offer refinance auto loans, as well as preapproved auto loans that can give you an advantage in the car buying process and make financing easier. If you already have a checking account, savings account or credit card with a certain bank, you may have an easier time getting approved for an auto loan with that financial institution. You may even get a better rate.
Like banks, credit unions typically offer financing and refinancing for new and used vehicles. However, you have to be a member of a credit union to access its financial products. Membership requirements vary, but the process is simple for many credit unions. Joining can be worth it since credit unions often offer lower interest rates and are more likely to approve loans for borrowers with bad credit.
Since they don’t have the overhead of physical branches like banks and credit unions, online lending institutions can sometimes offer lower rates. Many of these lenders are backed by commercial banks or are divisions of commercial banks.
Lending marketplaces let you easily compare car financing offers. After you enter your information on one of these websites, you’ll get several loan offers from different lenders. Using these marketplaces can be a good way to find the lowest rates for your credit profile.
Car dealerships can sometimes offer the lowest auto loan interest rates. While 0% financing is only available for those with excellent credit, you’ll have a hard time finding it anywhere else. But some dealerships offer high interest rates compared to other lenders. Knowing what rates to expect and not allowing yourself to get worn down at the dealership can help you navigate this situation.
Getting a preapproved car loan from another financial institution before you head to the lot may help you negotiate for a better rate, as the dealership may try to beat the other lender’s rate to win your business.
How to get lower interest rates on your auto loan
If you’re looking for the best auto loan rates, these tips may help:
- Increase your down payment: Putting more money down on the car reduces the LTV ratio on your auto loan, which may get you a better interest rate.
- Get a discount: One of the most common discounts in the automotive finance industry is for setting up automatic payments, which can reduce your interest rate by as much as 0.5%.
- Raise your credit score: Having a higher credit score can help you get lower auto loan rates. There are many ways to raise your credit score, but it can take a lot of time.
- Get a co-signer: If you have bad credit, getting a friend or family member with a good credit score to co-sign a loan with you might get you a lower rate.
- Look for a newer car: Most lenders adjust their rates based on the age of a car. If you can find a newer car within your price range, you may get better auto loan interest rates for your credit score.
- Choose a shorter loan term: Longer loan terms have lower monthly payments, but they usually come with higher interest rates. If you can afford the higher payments that come with a shorter loan term, you’ll likely get a lower interest rate and pay less interest over the lifetime of your loan.
- Refinance later: If you’re stuck with a high interest rate due to a poor credit score, you may benefit from refinancing your auto loan in the future. You can take the interest rate available to you now and make timely payments to improve your credit score, which will eventually put you in a better position with lenders.
Source: Capital One
Auto loan interest rates by credit score: the bottom line
Nearly all lenders set auto loan interest rates by credit score to some extent. While other factors affect the rates available to you, your credit score typically plays the most influential role. Between banks, credit unions, online lenders, loan marketplaces and car dealerships, you have plenty of options for auto loans. Depending on your situation, one may offer you better rates than others.
Recommended auto loan providers
While no one lender offers the best rates for everyone, some offer better auto loan interest rates by credit score than others. The only way to know whether you’re getting the best auto loan rates for your credit score is to source loan offers from several lenders and compare them. We recommend myAutoloan and Auto Credit Express as good places to start your search.
As a loan marketplace, myAutoloan lets you source offers from lenders in one place. This can help you find the best auto loan interest rates by credit score with less legwork than reaching out to lenders on your own. Rates for borrowers with excellent credit scores start at 3.99% for new cars and 4.24% for used cars, but those with credit scores of 575 or above can find loan offers through the site.
Auto Credit Express
If your credit score is on the lower end of the spectrum, you may have a hard time finding auto loans from traditional lenders. Auto Credit Express is a financing broker that specializes in securing financing for people with bad credit. Borrowers with bad credit, no credit or even bankruptcies may find loans through Auto Credit Express, even if they’ve had a hard time getting financing elsewhere. Because Auto Credit Express works with multiple lenders, rates and credit requirements vary.
Frequently Asked Questions
Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.
In this article, we selected companies with high overall ratings and cost ratings. The cost ratings were informed by starting APR and loan amounts.
*Data accurate at time of publication