What is the average interest rate for a car loan? – Forbes Advisor
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Buying a vehicle is a big purchase, whether it’s a new or used car. There’s so much to consider, including the type of car you’re getting, your down payment, trade-in value, and how much you can afford to borrow for an auto loan.
When it comes to auto loan interest rates, your credit score is one of the main determining factors. The higher your credit score, the lower your interest rate will be. A great credit score tells lenders that you’re responsible for your credit and won’t have any problems making your car loan payments. Here’s what else you need to know about car loan interest rates.
Average car loan interest rate
The average auto loan interest rate was 3.86% for new cars, according to Experian’s report on the state of the auto finance market in the fourth quarter of 2021. For used cars, the rate of average interest was 8.21%.
When it comes to car loans, there are a few factors that go into how much interest you’ll pay, including:
- Credit score: Your credit score is one of the most important factors in calculating interest rates.
- Term of the loan: Terms can vary from 24 to 84 months for auto loans. With a longer-term loan, your monthly payment will be lower, but your interest rate will likely be higher than with a shorter-term loan.
- Vehicle type: Interest rates for newer cars might be lower than for used cars, as used vehicles have already started to depreciate.
- Advance payment: Having enough cash on hand to use as a down payment will reduce the amount of money you need to borrow. If you trade in your car, this can also be used as a down payment. The less you need to borrow, the less interest you will pay over the total term of the loan.
Related: What is a good APR for a car?
Average auto loan interest rate by credit score
Although it is possible for borrowers with bad credit to qualify for a car loan, they will pay more interest than someone with great credit.
Auto loan repayment example
If you don’t have great credit, you can expect to have a higher interest rate and pay more total interest over the full term of your car loan than someone with great or great credit. .
We’ll walk through an example using an auto loan calculator. Let’s say you apply for a loan for a new car and you need to finance $25,000 over five years (or 60 months) and have no money set aside. Here’s an example of estimating what you’d pay with a great credit score versus a bad score:
Not only would you have a lower monthly payment with a great credit rating, but you’d also save over $7,100 in interest over the life of the loan.
Average Used Car Loan Interest Rate by Credit Score
Since used cars tend to have higher interest rates than new cars, you might pay more interest even if you borrow less on a car loan.
How to get the best auto loan rate
Getting the lowest interest rate available means you’ll avoid paying more than you need to on top of what you originally borrowed. But getting the lowest interest rate can take time and work. Here are six things you can do to help you get a better auto loan rate.
1. Find a car you can afford
Instead of finding the car you want, try to find one that reasonably fits your budget. Use an auto loan calculator to determine a comfortable monthly payment, but also give yourself some wiggle room.
Remember that you will still have to pay for gas, maintenance, car insurance and other expenses. Once you know how much car you can afford, browse vehicles in that price range.
2. Improve your credit
To get a lower auto loan rate, make sure your credit score is in the best possible shape. You can access your credit file for free at AnnualCreditReport.com and see if there are any marks or errors that you can remove or resolve. If you have an outstanding debt that’s lowering your credit score, be sure to pay it off. You should also try to pay off your credit cards to reduce your credit utilization rate.
After improving what you can, it may still take a few weeks to think about your credit score. But it’s worth being patient and waiting for a new car until your score is updated.
3. Save for a down payment
Although the safest car purchase option is to pay cash, it is not always an option for everyone. It’s possible to get a car loan with no down payment, but having one will help you keep monthly payments low and reduce the amount you need to borrow.
You may also consider trading in your current car to reduce your car loan repayments.
Do your homework. Explore the different dealerships to see which ones have the best deals on vehicles, as well as current promotional offers. Many dealerships offer the best deals around holidays like Memorial Day, Independence Day, and Labor Day.
So if you can wait until then to make your car purchases, you might be able to get a much cheaper vehicle, whether it’s a lower interest rate, vehicle price, or both. .
5. Get pre-approved
However, the dealership doesn’t have to be where you get a car loan. While many offer financing, you are limited to one lender. Instead, shop around with different banks, credit unions, and online lenders to see which ones have the best interest rates and terms for you.
Consider getting pre-approved for a car loan before going to the dealership. This way, with financing in hand, you can be sure you got the best possible rate by first comparing several different offers.
6. Apply with a co-signer
If you’re struggling to get the lowest possible rate, consider finding a co-signer to help you out. This can be a parent, spouse, or another person you trust to help you qualify. Having a co-signer means that someone else takes out the loan with you. With their strong credit history, you get the lowest interest rates and best repayment terms available.
But keep in mind that a co-signer is responsible for the loan just like you. So if you fail to make payments or fall behind, their credit score will suffer, just like yours. Both of you will struggle to qualify for loan opportunities in the future if this happens, so make sure you are both prepared for this responsibility.
Related: Should you pay off your car loan sooner?