If you’re in the market for a car, you’re probably thinking about the interest rate on your car loan. Car loan interest rates are determined by your credit score. According to Experian’s State of the Automotive Finance Market report, the average auto loan interest rate for new cars in 2023’s first quarter was 6.58 percent — 11.70 percent for used cars.
Generally, the lower your score, the higher your annual percentage rate (APR) will be. However, you don’t need a perfect score to get a good rate. To find the best auto loan rate, it is wise to shop around and work to improve your credit score if it isn’t in the best shape.
Average auto loan interest rates by credit score
Lenders base your interest rates primarily on your credit score. But you can still get a decent rate without top-tier credit.
To get a better idea of just how much of a difference a higher credit score can make, and an idea of where your interest rate might land, it’s worth looking at the average rates by credit score.
|Personal FICO score||Average interest rate for new car loans||Average interest rate for used car loans|
|Source: Experian State of the Automotive Finance Market Q1 2023|
|781 to 850||5.18%||6.79%|
|661 to 780||6.40%||8.75%|
|601 to 660||8.86%||13.28%|
|501 to 600||11.53%||18.55%|
|300 to 500||14.08%||21.32%|
Factors that affect auto loan interest rates
While your credit score plays a large part in determining your interest rate, there are other factors to consider alongside it.
The two most common scores used when underwriting car loans are FICO and VantageScore. Both account for several measures of financial wellness, including payment history, credit utilization, credit mix and average age of accounts.
There are some differences in the number of metrics used and how they’re weighted. But both scores fall between 300 and 850. As the chart shows, the best rates go to buyers with scores in the mid-600s and higher.
Lenders may instead use an auto industry-specific scoring system, such as the FICO Auto Score, which ranges from 250 to 900. These scores consider the same factors but give more weight to risk factors associated with your likelihood of repaying an auto loan.
Different lenders have different credit underwriting criteria. All will consider your credit score, your income and debt-to-income ratio, but lenders differ in what they find acceptable. Some may consider your education or professional experience, too.
Outside of qualification and underwriting standards, some lenders simply offer lower rates than others.
Both the price of the vehicle and your down payment factor into the amount borrowed. If you’re not willing to put more than the required amount down, the lender may see it as an increased risk and up the interest rate to compensate.
Length of the loan
Typically, the longer your loan term, the more interest you’ll pay as interest accumulates. But, aside from the additional interest accrued, lenders may charge higher interest rates for longer loans. This is because there is more perceived risk for the lender. Rates may increase over time, meaning there may be missed opportunities for higher returns. Additionally, the longer the loan, the higher the likelihood that some share of it does not get paid back in full.
Economic and market conditions
While the primary factors that will determine your auto loan interest rate are your credit history and the loan’s details, there are also broader market factors that play a role. When interest rates are high, as dictated by the Federal Reserve, it costs lenders more to borrow money. In turn, you are likely to face higher interest rates.
The current Federal Reserve target interest rate is 5 percent to 5.25 percent, up from 2.25% to 2.50% in 2022. As a result, interest rates for the average auto loan have increased. If the Federal Reserve lowers interest rates in the coming months, the rates for auto loans are likely to drop as well.
How to get a better auto loan interest rate
There are a few ways to improve your chances of getting a competitive interest rate, regardless of your credit score.
- Shop around: Shop around with multiple lenders, including banks and credit unions, and compare auto loan interest rates. Not all lenders report to credit bureaus, so if you’re trying to build your credit, make sure to pick one that does.
- Apply for preapproval: It is a good idea to apply for preapproval with at least three lenders before you settle on one. You will be required to provide some personal and employment information. Preapproval requires a hard pull, which will temporarily drop your score by a few points, so it’s best to keep your application window to 14 days so you only take one ding.
- Make a larger down payment: A down payment decreases the amount you need to borrow. By decreasing the amount borrowed, the lender takes on less risk. Less risk translates to lower interest rates.
- Get a co-signer: If you have a lower credit score, consider asking a family member or trusted friend who has an excellent credit score to co-sign your auto loan. Your co-signer will assume the debt if you can’t pay it back, which means there’s less risk for the lender. Keep in mind that this can strain your relationship if you are unable to pay.
Where to find the best auto loans
There are many avenues you can use to find the best auto loan.
- Banks. If you already have a relationship with a bank and have a good credit history, your bank may provide a competitive interest rate.
- Credit unions. Like a bank, if you’re a member of a credit union, it may offer a competitive interest rate. If you have less-than-perfect credit, a credit union may be willing to look past that and still extend a better rate than you may find from other lenders.
- Online lenders. Many online lenders offer auto loans, typically with fast approvals and a prequalification process that doesn’t require a hard credit pull. As with most direct lenders, you’ll likely get a better rate than you would by applying with a dealership.
- Car dealers. This is one of the biggest ways that you can get stuck with a higher interest rate. Dealers add markups to interest rates provided, which means you’ll be stuck paying more than if you went to the lender directly. Check with several different lenders before going to a dealership to get the best deal possible.
The bottom line
Low car loan rates are typically reserved for borrowers with near-perfect credit score. While you’re not guaranteed to get the figure corresponding to the credit bracket you’re in, keep it in mind while shopping around for a good deal.
Whether you know your credit score or not, you can prequalify with lenders online and off to see what kind of rates you’re eligible for.