Auto loan interest rates are determined by your credit score. The lower your score, the higher your interest rate will be. However, you don’t need a perfect score to get a good rate. To find the best auto loan rate, it’s wise to shop around and work to improve your credit score if it’s not in top shape.
Average auto loan interest rates by credit score
Auto loan interest rates are directly related to your credit score. That said, you can still get a decent rate without having top-notch credit.
To get a better idea of the difference a higher credit score can make, and an idea of where your interest rate might land, it’s worth looking at average rates by credit score.
|Credit score||Average interest rate for new car loans||Average interest rate for used car loans|
|781 to 850||2.96%||3.68%|
|661 to 780||4.03%||5.53%|
|601 to 660||6.57%||10.33%|
|501 to 600||9.75%||16.85%|
|300 to 500||12.84%||20.43%|
Source: Experian State of the automotive financing market Q2 2022
Factors That Affect Auto Loan Interest Rates
Although your credit score plays an important role in determining how much interest you pay, there are other factors to consider.
The two most common scores used when taking out auto loans are FICO and VantageScore. The two represent several measures of financial well-being, including payment history, credit usage, credit mix, and average account age.
There are some differences in the number of metrics used and how they are weighted. But both scores are between 300 and 850.
Different lenders will have different credit underwriting criteria. Besides the credit score, your income and your debt to income ratio are going to be taken into account. Some may take your education or work experience into account or weigh it more heavily than others.
Apart from qualification and underwriting standards, some lenders also offer lower rates in general than others. Just be aware that the lowest APRs — those typically listed on lenders’ websites — go to borrowers with excellent credit.
The price of the vehicle and your down payment are taken into account in the amount borrowed. If you’re not ready to put down more than the required amount, the lender may view it as an increased risk and raise the interest rate to compensate.
term of the loan
The longer your loan term, the more interest you will pay. But, aside from the additional accrued interest, lenders may charge higher interest rates for longer loans.
How to get a better auto loan interest rate
There are several ways to improve your chances of getting a competitive interest rate, regardless of your credit score.
Compare the prices
Shop around with multiple lenders, including banks and credit unions, and compare car loan interest rates. Not all lenders report to the credit bureaus, so if you’re trying to boost your credit, be sure to choose one that does.
It’s a good idea to get pre-approved from at least three lenders before choosing a lender. You will be asked to provide personal and professional information, but not all quotes will require a thorough credit check. Because some require a hard pull, it’s best to keep your application window to around two weeks.
Make a bigger down payment
A down payment decreases the amount you need to borrow. By reducing the amount borrowed, the lender takes less risk. Less risk translates into lower interest rates.
Get a co-signer
If you have a lower credit score, consider asking a trusted family member or friend who has a great credit score to co-sign your car loan. Your co-signer will assume the debt if you can’t repay it, which means there’s less risk for the lender. Keep in mind that it can strain a relationship if you are unable to pay.
Where to find the best car loans
There are many different avenues you can use to find the best auto loan.
- Banks. If you already have a relationship with a bank and have a high credit rating, your bank may offer you one of the most competitive interest rates. But read the entire agreement before signing – some banks write a clause that allows them to draw on your checks or savings.
- Credit unions. Like a bank, if you are a member of a credit union, they may offer a competitive interest rate. And if you have less than perfect credit, a credit union may be willing to look beyond that and still offer a reasonable rate.
- Online lenders. There are several online lenders that offer auto loans that you can prequalify for. As with most direct lenders, you’ll likely get a better rate than applying through a dealership.
- Car dealerships. This is one of the main ways to end up with a higher interest rate. Dealerships add markups to the interest rates provided, which means you will have to pay more than if you went directly to the lender. Check with several different lenders before heading to a dealership to get the best deal possible.
The bottom line
Low auto loan rates are usually reserved for borrowers with near-perfect credit scores. And while it’s good to know the average rates, you’re not guaranteed to get the number for the credit bracket you’re in.
Whether or not you know your credit score, you can prequalify with online and offline lenders to see what kind of rates you qualify for.