Average Car Loan Interest Rates by Credit Score

How credit scores affect car loan interest rates

Your credit score is a three-digit representation of how you’ve handled credit in the past. It’s based on information in your credit report, including whether you’ve missed payments before or if you’re currently behind on your existing loans. 

A higher credit score generally translates to lower loan rates, whether you’re getting a mortgage, credit card or auto loan. Lenders want to know that you’re likely to repay the loan on time and in full. If your credit score reflects a history of on-time payments, lenders often view you as a lower risk. On the other hand, a lower credit score often indicates difficulty making payments in the past. Lenders typically charge a higher interest rate to offset some of the risk that you might not finish paying the loan.

In most cases, your credit score is the biggest factor influencing your overall car loan interest rate.

How often do auto loan rates change? 

Lenders usually review their base rates every month. However, rates can change more often, depending on economic and market conditions. 

Most car loans have fixed interest rates, meaning once you sign the paperwork, you don’t have to worry about your rate heading higher. 

If you want a different interest rate later, you can compare auto loan refinancing rates to see if you qualify for a lower APR and save money on interest.

Factors influencing car loan interest rates

While your credit score is one of the most influential factors in determining your auto loan rate, there are other items lenders consider when offering a rate quote:

• Federal-funds rate and market conditions: The benchmark set by the Federal Reserve can influence the rates lenders charge. Additionally, rates might change based on market and economic conditions. Lenders review national and local trends when setting base rates.
• Your debt-to-income ratio (DTI): Lenders review your income to determine whether you’re likely to afford your payments with relative ease. They will look at how much other debt you have and whether adding a car payment to your budget will cause undue financial stress. If you have a comparatively high DTI, a lender might quote a higher rate.
• Loan amount: A higher loan amount can result in a higher auto loan rate quote than a lower amount. If you provide a down payment that reduces the amount you borrow, you might qualify for a lower APR.
• Loan term: Your loan term also influences your car loan interest rate. A longer term usually includes a higher interest rate, while a shorter term, in which a lender gets its money back sooner, comes with a lower rate.
• New vs. used car: Used cars generally have higher interest rates than new cars. In fact, the difference is larger for those with lower credit scores. The lower your credit score, the more likely you are to pay above 20% APR for a used car.
• Type of vehicle: Whether you’re buying a sports car or a family sedan can also make a difference in your interest rate. If a lender views your purchase as somewhat risky, it’s common to quote you a higher APR.

Tips to secure a lower car loan interest rate

To save money on interest and potentially qualify for the best possible car loan rates, consider the following actions:

• Improve your credit score: Review your credit report for errors and dispute inaccuracies. If mistakes on your report are dragging your score down, fixing them gives you a boost. Other ways to improve your credit history include making on-time payments, paying down some of your revolving credit lines and avoiding taking on new debt ahead of car shopping.
• Compare lenders: Some online lenders can provide you with prequalification and a car loan rate quote without making a hard inquiry on your credit. Compare rates and terms from three to five lenders to determine where you might get the best deal. Consider banks, credit unions, dealer financing and online lenders.
• Offer a down payment: If you have money saved, consider making a down payment. A trade-in might also be considered part of your down payment. Find out if trading in a vehicle and making a down payment can get you a lower interest rate.
• Review your budget and choose a shorter loan term: Instead of agreeing to the longest loan term, which might be up to 84 months, review your budget to see if you can afford a higher payment with a lower interest rate. For example, you might have a higher monthly payment if you choose a 48-month loan instead of a 72-month loan, but the lender might give you a break on the interest rate. Over time, the combination of a lower rate and a shorter term might save you hundreds of dollars.
• Use a cosigner: If you don’t qualify for a lower interest rate on your own due to your credit score, consider finding a cosigner. A cosigner with good credit might be willing to take responsibility for your loan if you default. Check with the lender to see if it accepts cosigners for car loans and whether adding one could lower your interest rate.