What's the Average Auto Loan Interest Rate?
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What's the Average Auto Loan Interest Rate?

By Michael O'Connor | October 18, 2021

National Average Auto Loan Interest Rate

As of 2021, the average interest rate for a 48-month loan on a new car is 5.21 APR. The average rate for a 60-month loan is 4.96 APR.

These rates are constantly changing and there will be many different factors that determine your individual rate but this will help you decide if your offered rate is close to the national average.

If you have been considering purchasing a new car, it is important to know what the average auto loan interest rates are. Understanding this will help you pay the least amount for your car possible and can give you a good idea of what a reasonable rate is. Having something to compare with the loan rate you are being offered is a great way to shop around and get the best deal.

There are many different ways that auto loan interest rates are calculated. It should be noted that interest rates are never set in stone and they will fluctuate with the automotive finance market. There are also a lot of things you can do to save yourself some money on a new or used car loan.

What is an Auto Loan Interest Rate?

An auto loan interest rate is the amount that you are paying to borrow the money for a car from a lender. Whether you are getting your loan from a dealership or a bank, you will have to pay a certain percentage of that loan on top of paying back the loan itself. This is the price of getting the money upfront to purchase the car.

Almost all loans will have an interest rate of some kind. Whether it is for a personal loan, a house, a car, or a business, there will always be a cost associated with getting a loan. Knowing how these rates are calculated and what the average rate is can help you when you are shopping around for a car loan.

How is an Interest Rate Calculated?

There are two different ways that financial institutions will calculate a loan’s interest rate: simple and precomputed. Both these types of loans have their own benefits and drawbacks and the type you get will depend on where you are getting the loan and what kinds of terms are available. This is why it is so important to shop around for a car loan instead of immediately taking the financing terms at the dealership.

A simple interest loan is the most common car loan and is based on what you owe each month. On the day your loan payment is due, your rate will be applied to the amount you owe. Because of this, your interest payments will be less as you pay off more of the loan.

Simple interest allows you to pay more on your monthly payments and pay less in interest. This means that you can end up paying less overall for your car loan by paying off the principal early. If you can do this, a simple interest loan is the cheapest way to finance a new car.

A precomputed loan is less common, but some lenders prefer them and they may be better for some borrowers. Precomputed loans have their total amount of interest calculated at the beginning of the loan term and then added onto the principal. Then, this amount is divided by the number of months in the term to get your monthly payment.

Precomputed loans can be detrimental to people who want to pay less on their interest as the loan progresses by paying extra at the beginning stages of the loan. However, if you don’t plan on paying more per month or paying off the loan early, they could be a good option for you.

Difference Between Interest and APR

Interest rate and APR are often used interchangeably but they do not necessarily mean the same thing. Your interest rate is simply the amount of money you are paying the institution to give you the loan. The APR, or annual percentage rate, is that amount of money plus any fees that come with getting the loan. It is incredibly important that you don’t compare these two rates when you are shopping around for loan options. A loan rate expressed as an APR will always be higher than one expressed as an interest rate.

Average Auto Loan Interest Rate By Credit Score

Whether you are buying a new or used car, your interest rate will depend heavily on your credit score. The good thing about this is that you can always work to improve your credit score if you are given too high of an interest rate on a loan. The average rates here are expressed as an APR so you can have a good idea of what the total cost may be to you.

Deep Subprime:
Deep subprime credit scores are generally in the 300 to 500 range. While these must be included, you should know that it would be very difficult to get a car loan with poor credit and it may end up being too expensive.

The average APR on a new car loan with this credit score is 14.59 percent. The average APR for a used car is 20.58 percent. These are incredibly high rates and you would probably end up paying much more for the vehicle than what it is worth if your credit score was low enough to warrant them.

Subprime credit is in the range of 501 to 600 range. For this kind of credit, you could get a car loan with an average APR of 11.03 percent for a new car. If you wanted to get a used car loan, you could get an average APR of 17.11 percent. These are still high percentages that are more on-par with credit card APRs instead of car loans and may not be worth getting.

Non-Prime credit is where loan rates start to get more reasonable. This is a score between 601 and 660 and is closer to the national average credit score. With a score like this, the average APR is 6.61 percent for a new car and 10.49 percent for a used vehicle.

As of 2021, the average credit score in the United States is 698. This falls under the category of prime credit, which is in the range of 661 and 780. People with good credit like this get offered APRs of 3.48 percent for a new car and 5.49 percent for a used car. This falls within the range of the national average and should be the rate that you are looking for on a car loan.

If you have excellent credit, you will be known as a superprime candidate. This means that you have a credit score between 781 and 850. With a score like that, you could get the best rates on a loan with an APR as low as 2.34 percent for a new car and 3.66 percent for a used car purchase.

What Affects an Auto Loan’s Interest Rate?

Many different factors will determine whether you get a good interest rate on your auto loan. Knowing what these factors are can help you prepare yourself and get the best possible rate. Some of these factors will be out of your control but others are things you can use to improve your particular auto loan.

Credit Score:
Your credit score is perhaps the most important factor when it comes to the interest rate for your auto loan. Auto lenders will look at your credit report and use it to determine their particular risk when reviewing your loan application. A lower credit score will always result in a higher interest rate. Lenders want to be sure that they get the largest portion of the loan back as possible should you default on the loan.

Financial Institution:
Where you get your loan will determine what you end up paying in interest. Many dealerships will offer auto loans, but they typically have the highest interest rates on the market. Your best bet for lower interest rates will be to get your loan either from a bank like Bank of America or a credit union. This will also allow you to get preapproval for your loan, which can help you when negotiating a price in a high-pressure situation at the dealership.

Term Length:
Your term length will determine what your interest rate ends up being. Longer loans may have slightly lower rates, but you will end up paying more by the time the loan term is over. A shorter loan term will mean higher monthly payments and a slightly higher rate, but you will end up paying less for the car when the loan is completely paid off.

Age of the Vehicle:
The interest rates for new cars are generally lower than rates for used cars. This is usually because used cars are cheaper and have a thinner profit margin for the dealership. Because of this, they will try to make more money by charging higher interest on financing. This is another reason why getting a preapproved loan from a bank will get you a better deal on your rate.

Economic Environment:
Interest rates are constantly changing due to economic factors. The economy will dictate the average auto loan interest rate as well as interest rates for other things like houses and credit cards. When the economy is not doing as well, interest rates are usually lowered to encourage people to spend more. When it is doing better, rates go up to keep inflation in check.

How to Get a Better Auto Loan Interest Rate

Auto loan rates are not set in stone. Since there are so many different factors at play when it comes to your loan being calculated, you can make decisions that will help you get the lowest rate. This will help you pay less for a car in the long run and ultimately get a better deal.

Increase Your Credit Score:
The best way to get a better car loan interest rate is to increase your FICO and Experian credit score. It may take some time to do, but by working on your score, you can end up paying much less for a car by the time the whole thing is paid off. There are many different ways to increase your score if you have bad credit. These include paying bills on time, using less than 30 percent of your credit limit, increasing your credit history, and taking care of delinquencies.

Buy New:
You will almost always get low rates when buying a new car. It may seem that buying used is cheaper upfront, but once you factor in a higher APR and potential repair costs, the true cost may end up being more than purchasing a new car. Always figure out what your final price will be on a vehicle before deciding to buy used. You may be surprised to find that a new car ends up being cheaper when all is said and done.

Put Down a Bigger Down Payment:
Putting down more of a down payment may not get you a better interest rate, but it will allow you to pay less over time. Your interest amount will be calculated based on the loan amount after the down payment. If this amount is less due to a bigger down payment, you will end up paying less in interest.

Early Repayment:
As long as you have a simple interest loan, paying more on your principal every month will decrease your interest payments as time goes on. Your rate will stay the same, but you will have less of a principal to pay off. This is also a great way to increase your credit score and get a better rate the next time you want to buy a car.

Final Thoughts

Your interest rate will determine whether or not you are getting the best auto loan for a new or used car. A better APR will bring the total price of a vehicle down significantly and there are many ways to get the best possible rate for you and your circumstances. Knowing what the average is for each credit score and type of vehicle will help you find a rate that is reasonable and won’t force you to pay more for a car than it is worth.