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In today's vehicle market, understanding the relationship between your credit score and the interest rates you're likely to secure on an auto loan is crucial. With car prices near historic highs and loan terms stretching longer than ever, even a small difference in APR can add up to thousands of dollars over the life of your financing. In this comprehensive guide, we'll dive deep into the most recent data on average auto loan interest rates by credit tier, explore the myriad factors that impact your individual rate, and equip you with practical strategies for securing the most affordable car loan possible.
Experian, one of the three major consumer credit bureaus, releases quarterly data on auto loan interest rates segmented by credit score tier. According to their Q1 2024 findings, the average interest rates for new and used car loans were as follows:
As this data illustrates, there's a strong correlation between credit scores and auto loan APRs. Borrowers with exceptional credit scores in the "super prime" range (FICO scores of 781 or above) secured the lowest average rates – 5.38% for new car loans and 6.80% for used car loans. On the other hand, those in the "deep subprime" category (scores between 300 and 500) faced average APRs of 15.62% on new vehicle loans and a staggering 21.57% on used vehicle financing.
To put these differences into perspective, consider a $25,000 car loan with a 60-month term. A super prime borrower with a 5% APR would pay a total of $27,611 over the life of the loan, including $2,611 in interest charges. That same loan at a deep subprime APR of 20% would cost $39,927 – a whopping $14,927 in total interest paid. That's a difference of over $12,000 in interest costs alone!
While your personal credit profile is the primary determinant of your auto loan APR, your geographic location can also have an impact. According to data from Edmunds, average car loan interest rates varied somewhat from state to state in May 2024.
Borrowers in Minnesota and Wisconsin enjoyed the lowest average rates on new vehicle loans, while those in Alaska, Georgia, and New Mexico faced some of the highest rates in the nation. For used vehicle loans, Maine and Vermont had the lowest average rates, while Alabama, Georgia, Hawaii, and Mississippi were among the states with the highest average APRs.
Of course, these state-level averages don't paint the full picture. Within any given state, individual borrowers with varying credit profiles and loan characteristics may receive dramatically different rate offers. However, understanding how rates in your area compare to the national landscape can help you gauge whether a particular loan offer is competitive for your market.
After remaining at historic lows for much of the early 2020s, auto loan interest rates began to climb markedly in 2022 and 2023. This upward trend was largely driven by persistent inflation and a series of aggressive interest rate hikes by the Federal Reserve, which increased the cost of borrowing across the economy.
However, data from Experian suggests that the worst of the rate increases may now be behind us. In Q1 2024, the average APR for new car loans actually ticked down to 6.73% from over 7% at the end of 2023. Similarly, the average rate for used car loans fell to 11.91% in Q1 2024 from nearly 13% in the previous quarter.
Most industry analysts expect auto loan rates to continue easing gradually over the course of 2024, assuming inflation remains under control and the Fed holds off on additional rate hikes. That said, rates are likely to remain elevated compared to pre-2022 levels for the foreseeable future.
For borrowers, this means that while securing an ultra-low APR may be challenging, there are still opportunities to find competitive rates by shopping around and leveraging a strong credit profile. As always, preparation and informed comparison shopping are key to getting the best deal possible.
While your credit score is undoubtedly the most significant factor influencing your car loan APR, it's not the only one. Lenders consider a range of criteria when setting interest rates, including:
FICO Scores and VantageScores, the two main consumer credit scoring models, range from 300 to 850. Higher scores signal to lenders that you're a lower-risk borrower, which generally translates to lower APRs. Scores of 720 and above are considered "excellent," while scores below 630 may make it difficult to qualify for the most competitive rates.
Each auto financing provider has its own unique underwriting model and risk tolerance. As a result, the same borrower might receive notably different rate quotes from different lenders, even with an identical credit profile. That's why it's so important to shop around and compare offers from multiple sources before committing to a loan.
In general, larger auto loans are viewed as higher risk than smaller loans. That's because more money is at stake for the lender if the borrower defaults. To compensate for this added risk, lenders may charge slightly higher APRs on bigger financing amounts.
The repayment term you choose also plays a role in your interest rate. Shorter terms (36-48 months) are inherently less risky for lenders than longer terms (60-84 months). The longer the loan, the more time there is for the borrower's financial circumstances to change or for the vehicle to depreciate faster than the loan is being paid off.
As a result, loans with shorter terms typically come with lower APRs than those with longer repayment periods. Of course, the tradeoff is that a shorter term means a higher monthly payment amount. It's important to strike a balance between securing a competitive rate and ensuring that your car payment fits comfortably within your budget.
The broader economic environment and prevailing market interest rates can have a significant impact on auto loan APRs at any given time. When the Federal Reserve raises its target federal funds rate – as it has done repeatedly since March 2022 – the cost of borrowing increases across the economy. Lenders must pay more to access the funds they loan out to consumers, and they pass those higher costs on in the form of increased APRs.
Conversely, when the Fed lowers rates, as it did in response to the COVID-19 pandemic in 2020, auto loan APRs typically fall as well. This makes car financing more affordable for borrowers but also means that lenders may tighten their approval criteria to manage their risk exposure.
Staying attuned to the current interest rate environment can help you understand how the market is likely to impact the loan offers you receive. However, it's important to remember that your individual financial profile is still the biggest determinant of your specific rate.
While factors like market conditions and lender policies are largely outside of your control, there are several proactive steps you can take to position yourself for the best possible auto loan rate. Here are six expert-backed strategies to help you secure a loan that fits your budget.
The single most effective way to reduce your car loan APR is to boost your credit scores before applying for financing. Start by pulling your credit reports from AnnualCreditReport.com and reviewing them carefully for errors or outdated negative information. If you find any inaccuracies, initiate a dispute with the relevant credit bureau to have them removed.
Next, commit to adopting responsible credit habits moving forward:
Improving your scores takes time and discipline, but the payoff in terms of your auto loan savings can be substantial. Even a small increase in your scores can mean a significantly lower APR and more manageable monthly payment.
One of the biggest mistakes car buyers make is accepting the first financing offer they receive without comparing other options. Interest rates and loan terms can vary dramatically from one lender to the next, so it pays to cast a wide net.
Before heading to the dealership, take the time to get pre-approved for an auto loan with at least three different lenders, such as banks, credit unions, and online loan providers. Each lender will have its own underwriting criteria and risk tolerance, so it's important to explore a range of options.
Once you have a few pre-approval offers in hand, you can use them as leverage to negotiate with the dealership's financing department. In some cases, the dealer may be able to beat the rates you've secured elsewhere. But even if they can't, you'll have the peace of mind of knowing you've found the best deal available to you.
Keep in mind that rate shopping for an auto loan will typically result in a temporary ding to your credit scores due to the hard inquiries lenders make when you apply. However, credit scoring models are designed to encourage rate shopping, so as long as you submit all of your applications within a 14-day window, they'll be counted as a single inquiry for scoring purposes.
It's a common misconception that a longer auto loan term is always better because it results in a lower monthly payment. While it's true that stretching out your loan over a longer period (say, 72 or 84 months) can reduce your monthly outlay, you'll likely pay for it in the form of a higher APR and much more interest over the life of the loan.
In general, the shortest loan term you can comfortably afford is the smartest choice. Here's an example to illustrate the difference:
Let's say you're financing a $30,000 vehicle with a loan term of 36, 48, 60, or 72 months. Assuming a credit score in the "prime" range (661-780), here's how the numbers break down:
As you can see, the 36-month loan would result in the lowest APR and the least amount of total interest paid over the life of the loan. Opting for the longer 72-month term would lower your monthly payment by nearly $400, but you'd end up paying over $3,200 more in interest charges.
Of course, it's crucial to choose a loan term and monthly payment that fit within your budget. Use an auto loan calculator to model out different scenarios and find the right balance for your financial situation. And remember, you can always pay more than the minimum due each month to pay off your loan faster and save on interest.
Saving up for a substantial down payment is one of the most effective ways to reduce the overall cost of your auto loan. The more money you put down upfront, the less you'll need to borrow and the lower your monthly payments will be.
Additionally, making a larger down payment can help you secure a lower APR. That's because lenders perceive loans with higher down payments as less risky – after all, the more of your own money you have invested in the vehicle, the less likely you are to default on the loan.
As a general rule of thumb, aim to put down at least 20% of the purchase price for a new vehicle and 10% for a used one. So, if you're buying a $30,000 car, that would mean coming up with $6,000 or $3,000 respectively.
If you don't have that much cash on hand, consider delaying your purchase for a few months to give yourself time to save up. You might also look into trading in your current vehicle or selling it privately to generate additional funds for your down payment.
If your credit scores are on the low side or you have a limited credit history, qualifying for a competitive auto loan rate on your own may be challenging. One potential solution is to apply with a creditworthy cosigner, such as a parent, spouse, or other trusted family member.
When someone cosigns your loan, the lender takes their credit profile into account when evaluating your application. This can help you secure a lower APR than you'd be able to get on your own, as the cosigner's strong credit helps offset your higher risk profile.
However, it's important to understand that cosigning is a serious responsibility. If you fail to make your loan payments on time, your cosigner's credit will take a hit right along with yours. And in the event of default, they'll be on the hook for repaying the loan in full.
Before asking someone to cosign your auto loan, have an open and honest conversation about the risks and responsibilities involved. Make sure they're comfortable with the arrangement and that you're both on the same page about your repayment plan.
If you're already locked into a high-APR auto loan, refinancing could be a smart way to secure a lower rate and reduce your monthly payment. This is especially true if your credit scores have improved significantly since you first took out the loan, or if overall interest rates have fallen.
The process of refinancing involves taking out a new loan to pay off your existing one. Ideally, the new loan will have a lower APR and more favorable terms than your current financing. Depending on your situation, you may also be able to extend your repayment term to further lower your monthly payment (though this will likely increase your total interest paid over the life of the loan).
As with any loan, it's important to shop around and compare offers from multiple lenders when refinancing. Look for a loan with a competitive APR, manageable monthly payment, and terms that align with your financial goals.
Keep in mind that refinancing may not be a viable option if you're currently underwater on your loan (meaning you owe more than the vehicle is worth) or if your car is too old or has too many miles on it. Lenders typically have restrictions on the age and mileage of vehicles they'll refinance.
But if you have a relatively new car, a solid payment history, and improved credit, refinancing could be a valuable tool for lowering your auto loan costs. Just be sure to crunch the numbers and ensure that any savings on interest outweigh the potential fees associated with originating a new loan.
Now that you have a sense of the average auto loan interest rates for different credit tiers, you may be wondering how to put this information to use. Here are a few key ways that understanding average rates can help you make smarter financing decisions:
Remember, though, that average rates are just that – averages. Your individual APR will depend on a variety of factors beyond just your credit score, including your income, debt-to-income ratio, loan-to-value ratio, and more. That's why it's so important to get personalized quotes from multiple lenders rather than relying solely on averages.
Think of average rates as a helpful starting point – a way to ballpark what you might qualify for and compare offers more objectively. But don't get too hung up on hitting a specific number. The most important thing is to find a loan that fits your budget and helps you achieve your larger financial goals.
These days, there are more options than ever for securing an auto loan. Depending on your credit profile, financial situation, and personal preferences, you may want to explore financing through:
Ultimately, there's no one-size-fits-all answer to where to find the best auto loan. The key is to cast a wide net and compare offers from multiple sources to find the most competitive rates and terms for your individual situation.
Don't be afraid to pit lenders against each other, either. If you have a strong offer from an online lender, for example, take it to your bank or credit union and see if they can beat it. The more options you have, the more bargaining power you'll wield.
Understanding average auto loan interest rates is a crucial piece of the car-buying puzzle. By knowing what rates to expect for your credit profile, you can more effectively budget for your purchase, compare offers, and negotiate with lenders to secure the best deal possible.
But it's important to remember that interest rates are just one factor in the overall cost of owning a car. Before taking on an auto loan, be sure to consider the big picture – including not just your monthly payment, but also things like insurance, fuel, maintenance, and depreciation.
Aim to keep your total car expenses (including your loan payment) to no more than 15-20% of your take-home pay. This will help ensure that you're not overextending yourself and putting your other financial goals at risk.
And if you find that you're not able to qualify for an affordable loan right now, don't be afraid to hit pause on your car purchase and focus on building your credit and savings. With time and discipline, you can position yourself for a much more favorable financing deal down the road.
Regardless of where you are in your car-buying journey, remember that knowledge is power. By educating yourself on average auto loan interest rates, comparison shopping, and negotiating with confidence, you can drive away with a loan that keeps your financial goals on track for the long haul.
With thirty years of experience in banking, debt collections, compliance, audit, and governance, I have supported strategic plans and improved customer experiences. I possess hands-on knowledge in crucial C-Suite areas, including developing new policies and procedures, optimizing their models, and exploring new tools to help institutions achieve their goals more effectively.
