Purchasing a car is a significant investment for most people, with new car prices estimated at $36,000 and above, while used cars cost about $20,000. Some people opt to take out an auto loan to finance the vehicle, but the loan interest rate increases the car’s final cost.
Looking at the first quarter of 2022, the average interest rate for a new car’s auto loan is about 4.09% and 8.66% for a used car’s auto loan, according to Experian.
When calculating the interest rate, multiple factors come into play. Some factors include the type of car you’re interested in, your location, vehicle’s age and mileage, and your credit score. The main determinants are your credit score and whether the car is new or used.
If you have a bad credit score, the interest rates with be higher than when your credit is good. Before applying for an auto loan, knowing the possible interest rate depending on your credit score is essential.
What Are the Average Auto Loan Rates by Credit Score?
A credit score is a 3-digit number ranging from 300 to 850 that represents your credit history. Lenders use your credit score to determine the risk of lending you and how much interest they’ll charge you.
When it comes to auto loans, taking out a loan with low credit scores is more expensive. You’ll pay significantly more than a person with high credit scores for the same car.
Auto Loan Rates in March 2022
| Credit Tier (Credit Score) | Average New Car Loan Interest Rate | Average Used Car Loan Interest Rate |
| Super prime (781-850) | 2.34% | 3.66% |
| Prime (661-780) | 3.48% | 5.49% |
| Nonprime (601-660) | 6.61% | 10.49% |
| Subprime (501-600) | 11.03% | 17.11% |
| Deep subprime (300-500) | 14.59% | 20.58% |
Understanding Auto Loan Rates
A score of 750 points and above is excellent credit. With excellent credit, lenders view you as low risk, so you’ll pay less interest. You’ll also have access to loan deals and financial incentives from the dealership, such as financing at zero percent or a .99 APR auto loan.
If you have a score ranging from 700 to 749, lenders consider you a reasonably low risk. For instance, with a 742 credit score, auto loan rates will be below average, but you may not qualify for a 0% financing privilege from the auto dealer.
For credit scores that are in the 600s, auto loans become more expensive. If you’re in this category, you can choose to refinance your car loan. The interest rates are low, so if you buy a high-interest rate car, you can refinance the loan to save money when your equity improves.
Subprime borrowers have poor credit. If you have poor credit, lenders consider you a high risk and charge you higher interest rates for protection against loss if you fail to pay back the loan.
As a deep subprime borrower, you’ll have difficulty finding a lender who is willing to finance your car. If you’re successful, the interest rates will be extremely high. Its likely to translate to high monthly payments, and the total cost of the vehicle will also go up.
Evidently, your credit score has a significant impact on your auto loan’s interest rate. For example, the auto loan interest rate with an 825 credit score is only about 2%. With a 769 credit score, the auto loan rate will be about 3.6%. The interest rate will determine the total cost of the car and your monthly payments—the higher your credit score, the lower the cost of borrowing in the long run.
How to Use Average Car Loan Interest Rates
With your credit score, you can determine the average auto loan interest that’s available for you. Use an auto loan payment calculator to approximate your monthly payments based on the length of your loan term.
Although you’ll only know the actual interest rate after applying for the loan, you’ll have a decent idea of the average rates. Keep in mind that longer loan terms have higher interest rates compared to shorter periods.
Start by requesting quotes from several lenders and compare the rates to ensure you’re getting the best deal for your specific financial capabilities.
If you have previously financed a car, you can opt for refinancing at a lower interest rate. You can apply for refinancing with a few lenders to see the rates you qualify for.
Why is the Average Interest Rate for Used Cars Higher than New Cars
The cost of purchasing a new car may be high upfront compared to a used car. However, the interest rates on auto loans are different regardless of your credit score. In general, the cost of financing a used car is higher by about 4%. Even with excellent credit scores, the price of a used car is still higher by about 1%.
The reason behind this difference is that used cars pose more risk than new cars. Since they have a lower value, the chances of the car gets totaled in an accident are higher. Used cars also have a lower resale value, ending up costing the lender more money. This risk gets transferred to you in the form of high-interest rates.
How to Get a Lower Interest Rate on your Auto Loan
Improve your Credit Score
The most pivotal way of reducing the interest rate on your auto loan is improving your credit score. As your credit score rises, you’ll qualify for better interest rates, saving you money in the long run. Some ways you’ll improve your credit score are paying your bills on time and minimizing your debt-to-income ratio.
For instance, with a 735 credit score, auto loan rates will be about 3.65%, but if you improve your credit score by 50 points, the interest rate will be lower.
Negotiate with the Dealer
It’s possible to negotiate the interest rate on your auto loan with the dealership. Based on your financial information, most auto dealers partner with lenders who propose the appropriate interest rate for you. The dealer can then choose to inflate the scale to gain more profit. This means that you have some wiggle room to negotiate with the dealer.
Compare Different Lenders
Financing your car via a dealership or the manufacturer is more expensive than going through a bank or credit union. However, most dealerships have promotional offers such as 0% financing.
If you decide to finance the purchase through a bank or credit union, you can apply to get pre-approved to know how much to expect on the loan interest rate.
Increase the Down Payment
Making a higher down payment minimizes the outstanding loan amount, which could translate to lower interest rates and lower monthly payments.
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