Average Car Loan Interest Rates
What does it all mean?!?
In 2022, new car loan rates range from 2.40% to 14.76% while used car loan rates range from 3.71% to 20.99%.
The difference between a low and high annual percentage rate (APR) is based largely on your credit score.
What Determines Average Car Loan Interest Rates?
The most important factor that decides your car loan interest rates is your credit score.
The better your score, the lower your APR will be.
The best rates are reserved for those with credit scores above 800, but according to Equifax, any score above 670 makes
you a “low-risk borrower” and opens the door to lower average auto loan rates.
To give you an idea of what average auto loan rates you can expect based on your credit score, see the table below.
These outline average auto loan rates for new and used cars based on information from the second quarter 2022 Experian State of the Auto Finance Market report.
You can see that rates change drastically by credit score. This also affects what you pay back to a large degree. Let’s say you took out a $10,000 auto loan with 60-month terms to purchase a new vehicle.
If you have excellent credit and get a rate of 2.40 percent, you would pay an extra $622 in interest. In other words, it costs $606 to take out a loan of $10,000 with that interest rate.
Now, let’s say you have a decent score of 650 and get a rate of 6.70 percent. In this case, you would pay an extra $1,796 in interest on top of the loan.
If a fair score gives you an average auto loan rate of 10.87 percent, you’d pay $3,007 in interest. And if you had a very high rate of 14.76 percent, you’d pay $4,170 in interest on the $10,000 loan. Ouch.
However, your credit score isn’t the only determining factor. Employment status, income, and the type of vehicle you purchase also affect rates. Having a steady income stream and purchasing a newer vehicle will result in better auto loan rate offers.
Credit Score And Car Loan Interest Rates Explained
Your credit score sums up your credit history as a number. To lenders, your score predicts the likelihood that you’ll make on-time payments. People with lower credit scores end up paying higher interest rates because lenders see them posing a higher risk of late payments or default.
On the other hand, people with good credit scores find lower interest rates because lenders see them as good candidates for paying back loans. Life happens, and you may have a low score because of something that happened in the past on your credit report. Unfortunately, the lowest rates are only available to people with the best scores.
Here’s how Experian ranks credit score ranges:
Super prime: 781 to 850
Prime: 661 to 780
Nonprime: 601 to 660
Subprime: 501 to 600
Deep subprime: 300 to 500
Tips For Reducing Average Car Loan Rates
The best way to reduce the average auto loan rates you find is to improve your credit score. This can be done by paying your bills on time and keeping your credit card balances low. Paying your monthly payments in full can also help. Outstanding debts or collection notices can impact your credit score, so paying these off will improve your credit.
However, building your credit score can take time and the advice above may not be practical for everyone, especially those with a limited income struggling to pay minimum balances each month.
There are a few other things that can reduce your auto loan rates:
Have someone cosign: Many lenders allow you to have another person cosign a loan. A cosigner with strong credit can reduce your interest rates.
Buy a new car instead of a used one: While new cars are more expensive, lenders typically offer lower auto loan rates for new car purchases.
Place a bigger down payment: A bigger down payment can reduce your interest rate as well as the amount of time it takes to pay off your loan.
You might also consider trying to pay your loan in a shorter time frame. While this may not reduce your loan interest rate, it will mean that you pay off your loan sooner and will have to pay less interest. However, be sure to read your loan contract language carefully. Some lenders charge a prepayment penalty – an extra fee for paying down your auto loan too early.