What is a good interest rate for a car loan? The answer depends on your credit score

Liz Knueven

Feb 28, 2020, 23:15 IST

What is a good interest rate for a car loan? The answer depends on your credit score

Shop around to make sure you're getting the best interest rate.

The interest rate on your auto loan will depend largely on your credit score, and whether you're buying a new or used vehicle.
The average APR for a borrower with good credit (a score between 661 and 780) was 4.96% for a new car purchase, and 6.36% for a used car purchase, according to Experian data from 2019.
Shop around for an interest rate that beats the average, and compare offers from multiple lenders to find the best.
See Business Insider's picks for the best car loans of 2020 »

When shopping for a new (or new-to-you) car, one of your first considerations is probably how you'll pay for it. If an auto loan is in your future, it's worth doing your research on what kinds of interest rates are available to you.

Auto loan interest rates, or APR, can vary widely, but the biggest factor is your credit score. You'll want to check your credit score before you begin the process - there are plenty of free tools to check your credit score online. If your credit score is low, you may pay quite a bit in interest. If possible, waiting to buy while you work on improving your credit could save a lot of money.

What factors influence auto loan interest rates?

Your auto loan's interest rate will be determined by a few factors:

Your credit score and history. The better your credit score, the less interest you'll pay. Auto loans are one borrowing situation where it can make a big difference - according to data from Experian, the average borrower with a credit score below 500 will pay 10.3% more than a buyer with a credit score above 780.
Whether you're buying a new or used car. Thanks to manufacturer incentives and higher resale value, new car purchases are less expensive to finance than used cars. It depends on credit scores, but used car financing is between 5% and .66% more expensive than new car financing, according to Experian data.
Your loan's length in months. Longer loan terms often have higher interest rates, since they're considered higher-risk.
The make, model, and year of the car you're buying. Some cars have better resale values than others, and that will play a part.
Your down payment. Making a down payment on your vehicle purchase will influence your car's loan-to-value ratio, calculated by dividing the amount you owe on the loan by the car's value after depreciation.

What's the average auto loan interest rate?

The average auto loan interest rate looks very different depending on your credit score. Credit reporting company Experian collects data on auto loan interest rates, and calculated average auto loan interest rates for new and used vehicle purchases across five credit levels. Here are the average interest rates borrowers in each credit category received in the third quarter of 2019 for new and used car loans.

For new car purchases, interest rates range from 14% to 4%.

Scores below 500: 14.3%
Scores between 501 and 600: 11.71%
Scores between 601 and 660: 7.77%
Scores between 661 and 780: 4.96%
Scores above 780: 4%

For used car purchases, interest rates can be as high as 19.7%, or as low as 4.66%.

Scores below 500: 19.72%
Scores between 501 and 600: 16.89%
Scores between 601 and 660: 11%
Scores between 661 and 780: 6.36%
Scores above 780: 4.66%

As Experian data shows, the difference in interest rates between a borrower with good credit and a borrower with poor credit could be as high as 10%.

How to find a car loan with a low APR

The car itself shouldn't be the only thing you're shopping for: Shop for your car loan. Get pre-approvals from several lenders, and compare them to find the best offer for you.

Good places to start looking include banks or local credit unions where you already have a relationship. There are also a variety of other online lenders and banks making auto loans - see Business Insider's list of the best auto loans of 2020 to get started.

Start getting pre-qualification offers up to a month before you want to buy. Depending on the lender, these approvals are generally valid for 30 to 60 days. Once you start submitting applications for pre-approvals, you have two weeks to submit as many as you'd like and have them appear as one inquiry on your credit report.

The best way to find a low interest rate on a car loan is to shop around, and compare several pre-approval offers from several different lenders. If you're still not impressed with your offers, improving your credit score could be a big help. Additionally, try reducing the amount you'll need to finance by saving up more money for a down payment, 0r shortening your loan term by paying more per month.