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Buying a new car can be an exciting experience. Many consumers enjoy the process of choosing their preferred make and model, a favorite color, and the top features they want in a new vehicle. Yet if you’re in the market for a new car, there are a few important financial details you’ll want to keep in mind before you finalize your purchase.
First, you need to make sure you stay within your budget when it comes to the price of your new or used vehicle purchase. If you’re using financing to pay for your purchase, another important detail to consider is the annual percentage rate (APR) of your car loan.
The APR a lender charges you can affect your monthly payment and the overall amount of interest you pay when you finance a vehicle. So, it’s wise to make sure you understand what a good APR is for a car loan and learn how to put yourself in a better position to qualify for attractive financing offers.
What is an APR and interest rate for a car loan?
Most consumers use financing to buy a car rather than paying for their purchase in cash. In the first half of 2023, 80 percent of consumers making new vehicle purchases and 38 percent of people buying used vehicles relied on auto financing—aka a car loan or lease—to finalize the purchase according to the Federal Reserve. Considering these facts, it’s important to understand how interest rates and annual percentage rates work on car loans and how financing charges could impact the overall price you pay for a vehicle. [1] Federalreserve.gov. “Nuts and Bolts of Today’s Auto Finance Market.” https://www.federalreserve.gov/publications/2023-november-consumer-community-context.htm
The interest rate a lender charges you is a percentage you pay based on the total loan amount of money you borrow. The higher your interest rate, the more you’ll pay to your lender throughout your loan term. [2] Consumerfinance.gov. “What is the difference between a loan interest rate and the APR?” https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-loan-interest-rate-and-the-apr-en-733/
The annual percentage rate or APR on a loan, however, doesn’t represent interest alone. Instead, APR measures the annual cost (expressed as a percentage) that you pay to borrow money from a lender. It includes interest charges plus the annual cost of additional loan fees. [3] Chase.com. “Car loan APR: What does it mean?” https://www.chase.com/personal/auto/education/financing/what-does-apr-on-a-car-loan-mean
An APR may include other costs such as the following:
- Origination fees
- Loan application fee
- Prepaid interest that accumulates before the first loan payment
- Documentation and administrative fees
- Sales tax and registration fees
- Extended warranties and service contracts
- Other costs the lender rolls into the loan [4] PNC.com. “What is APR on a Car Loan?” https://www.pnc.com/insights/personal-finance/borrow/what-is-apr-on-a-car.html
In some cases, the APR on a car loan could be the same as the interest rate. However, the two rates (APR and interest) will only match if the lender charges no extra fees.
It’s also worth mentioning that financing costs can sometimes feel confusing for a borrower. But the good news is that lender disclosures can make the cost of borrowing easier to understand.
The Federal Truth in Lending Act, called TILA for short, requires lenders to disclose the APR in every consumer loan agreement. These disclosures give you key information about the costs you’re really paying to borrow money when you finance a vehicle. Moreover, since all lenders have to follow the same rules when it comes to APR disclosures, you can use this information to compare financing offers and make sure you’re getting the best deal available when you take out a new car loan. [5] Finred.usalearning.gov. “Truth in Lending Act – Consumer Protection for Borrowing Money.” https://finred.usalearning.gov/assets/downloads/FINRED-TruthLendingAct-FS.pdf
Average car loan interest rate by credit score
Many details affect average car loan rates and the interest rate you pay as a borrower. For example, the interest rates that lenders offer borrowers change over time due to economic conditions. The federal funds rate—a rate set by the Federal Reserve and the suggested rate at which banks lend funds to each other—plays a role in determining the average interest rates borrowers pay for auto loans (and other types of financing). When the Federal Reserve raises the federal funds rate, it often costs more to borrow money. Likewise when Fed lowers rates, credit tends to be more affordable. [6] Capitalone.com. “How Does the Federal Reserve Impact Auto Loan Rates?” https://www.capitalone.com/cars/learn/managing-your-money-wisely/how-does-the-federal-reserve-impact-auto-loan-rates/2561
You, as a borrower, can’t control what happens on a broad economic level. But you can work to keep your credit score in the best condition possible in an effort to be eligible for the best interest rates lenders have to offer in the current market. Although there’s no minimum credit score to buy a car, a higher credit score can often make you eligible for a lower APR when you take out an auto loan. (Note: Lenders will also consider other factors on your auto loan application in addition to your credit score when determining loan eligibility and APR.)
Experian’s most recent State of the Automotive Finance Marketing Report provides insight into the average auto loan APR that consumers paid based on their credit score range during the most recent quarter (Q2 2024). Below is a closer look at that data.
| Average Auto Loan Interest Rates by Credit Score Range | |||
|---|---|---|---|
| Credit Score Range | Category | New Car APR | Used Car APR |
| 781 and above | Super prime | 5.25% | 7.13% |
| 661-780 | Prime | 6.87% | 9.36% |
| 601-660 | Near prime | 9.83% | 13.92% |
| 501-600 | Subprime | 13.18% | 18.86% |
| 500 and below | Deep subprime | 15.77% | 21.55% |
Source: Experian [7] Experian.com. “Average Car Loan Interest Rates by Credit Score.” https://www.experian.com/blogs/ask-experian/average-car-loan-interest-rates-by-credit-score/
What is a good APR for a new car?
The average APR for a new car loan was 6.84% in Q2 2024 according to Experian data. In general, if you can find financing with an annual percentage rate that’s at or below average based on the current market, you might consider the offer to be a good APR for a car loan. Yet the true definition of a good APR on a new car loan goes a bit deeper. [7] Experian.com. “Average Car Loan Interest Rates by Credit Score.” https://www.experian.com/blogs/ask-experian/average-car-loan-interest-rates-by-credit-score/
In addition to considering the average APR for a new car loan, you should also consider other factors that lenders consider when pricing your loan. For example, if you have an excellent credit score (e.g., 781 or higher) and a low debt-to-income ratio (see below for more information) there’s a good chance you may qualify for the most attractive financing offers that lenders have available.
In this scenario, an average APR on a new car loan might not be a “good” APR for your situation. Experian data reveals that the average car loan interest rate for borrowers with excellent credit scores was 5.25% in 2024. And as a highly-qualified borrower you might even be eligible for special dealer-incentivized financing offers like 0% APRs on certain vehicle makes and models. (Keep in mind that terms and conditions will apply to such offers which you should always review in detail before accepting any loan.) [7] Experian.com. “Average Car Loan Interest Rates by Credit Score.” https://www.experian.com/blogs/ask-experian/average-car-loan-interest-rates-by-credit-score/
On the other hand, buying a new car with bad credit could be a very different experience. You should expect to pay a higher-than-average interest rate for a car loan when you have bad credit due to the increased risk the lender is taking in this situation. Yet you can take steps to try to reduce your risk in this scenario—such as providing a larger down payment or adding a co-signer (like a spouse) with a good credit score.
What is a good APR for a used car?
For used car loans, the average APR was 12.01% in Q2 2024—nearly twice as high as the APR for new car loans during the same time period according to Experian data. As with new car loans, lenders tend to reserve the most competitive rates on used car loans for well-qualified borrowers. If you have good credit and a low DTI ratio, you’re more likely to qualify for a good APR on a used car. [7] Experian.com. “Average Car Loan Interest Rates by Credit Score.” https://www.experian.com/blogs/ask-experian/average-car-loan-interest-rates-by-credit-score/
Overall, if a lender offers you an APR that’s at or below average, you may consider the auto loan to feature a “good” annual percentage rate. Again, it’s wise to shop around and compare multiple loan offers to make sure you find the best deal available. With an excellent credit score, you might be eligible for an APR that’s lower than average. But if you have a fair credit score or a bad credit score, a higher-than-average APR on a used car loan might be the best offer available to you in your present situation.
How interest rates affect your car loan
Making sure you do everything in your power to secure the lowest APR possible on a car loan matters more than you may realize. A good APR has the potential to save you a lot of money—both on a monthly basis and over the life of your loan. Although a small difference in interest rates might not seem like a big deal on paper, a higher APR can add up to a big budget expense by the time you reach the end of your loan term.
The chart below shows how much a higher interest rate on a new car loan might cost you. For comparison purposes, we’ll examine hypothetical interest rates for a 48-month used auto loan and how those APRs impact both monthly payments and overall interest charges. The loan amount for this example will be $28,000—the approximate average transaction price for a used vehicle sold in the U.S. as of October 2024 according to J.D. Power. [8] JDPower.com. “Used Car Prices: October 2024.” https://www.jdpower.com/cars/shopping-guides/used-car-prices-october-2024#
| How APR impacts car loan costs | ||
|---|---|---|
| APR | Monthly Payment | Total Interest |
| 7.851% | $682 | $4,717 |
| 9.024% | $697 | $5,461 |
| 10.971% | $723 | $6,717 |
| 11.896% | $736 | $7,324 |
| 14.267% | $769 | $8,907 |
| 16.35% | $799 | $10,331 |
Source: myFICO Loan Savings Calculator [9] myFICO.com. “Loan Savings Calculator.” https://www.myfico.com/credit-education/calculators/loan-savings-calculator/
The difference between a 48-month used auto loan with a 7.851% APR and an auto loan for the same duration with a 16.35% is meaningful. In this scenario, when comparing the loan with the higher interest rate to the lower-rate loan you would pay an extra $117 per month and over double the amount of interest—an additional $5,614—before the end of your loan term.
Even the difference between a 14.267% APR and a 16.35% APR in the example above could impact your monthly budget and overall interest costs. When comparing these two rates, the higher APR would cost you $30 extra per month ($360 per year) and result in $1,424 in added interest fees over the course of the 48-month loan.
Factors that determine your APR
Lenders consider a variety of factors when deciding whether to approve your loan application and what APR to offer you. Below are some of the main criteria that could impact the price you’ll pay for financing when you take out a new or used car loan.
Credit score and credit history
As mentioned, your credit score is one of the primary factors that lenders use to assess your risk as a borrower and to set the APR on your car loan. Auto lenders may also consider your credit report from one or more of the major credit bureaus—Equifax, Trans Union, or Experian—when you apply for financing.
If you want to qualify for a car loan with a competitive interest rate, your best bet is to review your credit scores and credit reports from all three credit bureaus to see where you stand. Keep in mind that the Fair Credit Reporting Act (FCRA) gives you the right to dispute any errors on your credit reports if you find inaccurate information during your credit review. Also, if you discover you need to build (or rebuild) your credit, it may be a good idea to work toward that goal before you apply for a car loan. [10] Consumerfinance.gov. “A Summary of Your Rights Under the Fair Credit Reporting Act.” https://files.consumerfinance.gov/f/201504_cfpb_summary_your-rights-under-fcra.pdf
Income and debts
The relationship between the income you earn and the debts you owe—collectively known as your debt-to-income (DTI) ratio—also helps determine how much you pay for an auto loan. This figure is a calculation of your monthly debt payments divided by your gross monthly income. When you apply for an auto loan, lenders use DTI ratio details to determine your ability to afford additional debt in the form of a new car payment. [11] Consumerfinance.gov. “What is a debt-to-income ratio?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/
Most lenders prefer to see a DTI ratio of 35% or lower when you apply for an auto loan. You might qualify for financing with a DTI ratio as high as 46%, but you’re likely to pay a higher APR due to the added risk. [12] TDECU.org. “What’s a Good Debt to Income Ratio (DTI) for a Car Loan?” https://www.tdecu.org/blog/good-debt-to-income-ratio-for-a-car-loan
Vehicle age
Another detail that affects the lender’s risk, and therefore the price of your loan, is the age of the vehicle you want to finance. A used car has more depreciation due to the wear and tear on the vehicle. As a result, the lender will consider the average life left in the vehicle and will typically offer borrowers a shorter loan term and higher APR for used car loans compared to new car loans. [13] Chase.com. “How do lenders decide my auto loan interest rate?” https://www.chase.com/personal/auto/education/financing/auto-loan-interest-rate
Loan term
The amount of time you take to repay your auto loan typically influences the APR a lender offers you as well. And, again, it all comes down to risk. With shorter loan terms the lender can anticipate getting its money back faster—reducing the likelihood of default. On the other hand, if you want to take out an auto loan with a lengthy repayment period your lender will likely charge you a higher interest rate in response. (Note: Long-term auto loans feature numerous drawbacks and are best avoided if possible.)
Down payment
Providing a large down payment when you purchase a car might work in your favor where your interest rate is concerned. When you provide a down payment, it reduces your overall purchase price and can lower your monthly car payment. These factors may decrease the risk for the lender and could help you score a better APR on your loan. [14] Consumerfinance.gov. “What is a loan-to-value ratio in an auto loan?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-to-value-ratio-in-an-auto-loan-en-769/
Employment history
Lenders will also consider the amount of time you’ve worked at your current job when you apply for a car loan. These details are important (and may impact your APR and basic loan approval chances) because lenders want to verify that you have a steady income so you can keep up with new and existing credit obligations. [15] USAA.com. “Understanding APR and how it affects your car loan.” https://www.usaa.com/inet/wc/advice-auto-understanding-APR?akredirect=true
Bottom line
The interest rate you pay on your auto loan will have a big impact on the price you pay for a car—both on a monthly basis and your overall financing costs. So, it’s important to pay close attention to the annual percentage rate that a lender offers you when you apply for a car loan.
Be sure to take the time to shop around and compare offers from multiple lenders until you’re sure you’ve found the best car loan for your situation. Keep in mind that lenders base the interest rates they offer you on details like your credit, debt, and income details, the car you choose to finance, and other factors. So, if you’re not happy with the APRs lenders are offering you, review the information above and see if you can make moves to put yourself in a better borrowing position before you reapply for financing.
Sources
- [1] Federalreserve.gov. “Nuts and Bolts of Today’s Auto Finance Market.” https://www.federalreserve.gov/publications/2023-november-consumer-community-context.htm
- [2] Consumerfinance.gov. “What is the difference between a loan interest rate and the APR?” https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-loan-interest-rate-and-the-apr-en-733/
- [3] Chase.com. “Car loan APR: What does it mean?” https://www.chase.com/personal/auto/education/financing/what-does-apr-on-a-car-loan-mean
- [4] PNC.com. “What is APR on a Car Loan?” https://www.pnc.com/insights/personal-finance/borrow/what-is-apr-on-a-car.html
- [5] Finred.usalearning.gov. “Truth in Lending Act – Consumer Protection for Borrowing Money.” https://finred.usalearning.gov/assets/downloads/FINRED-TruthLendingAct-FS.pdf
- [6] Capitalone.com. “How Does the Federal Reserve Impact Auto Loan Rates?” https://www.capitalone.com/cars/learn/managing-your-money-wisely/how-does-the-federal-reserve-impact-auto-loan-rates/2561
- [7] Experian.com. “Average Car Loan Interest Rates by Credit Score.” https://www.experian.com/blogs/ask-experian/average-car-loan-interest-rates-by-credit-score/
- [8] JDPower.com. “Used Car Prices: October 2024.” https://www.jdpower.com/cars/shopping-guides/used-car-prices-october-2024#
- [9] myFICO.com. “Loan Savings Calculator.” https://www.myfico.com/credit-education/calculators/loan-savings-calculator/
- [10] Consumerfinance.gov. “A Summary of Your Rights Under the Fair Credit Reporting Act.” https://files.consumerfinance.gov/f/201504_cfpb_summary_your-rights-under-fcra.pdf
- [11] Consumerfinance.gov. “What is a debt-to-income ratio?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/
- [12] TDECU.org. “What’s a Good Debt to Income Ratio (DTI) for a Car Loan?” https://www.tdecu.org/blog/good-debt-to-income-ratio-for-a-car-loan
- [13] Chase.com. “How do lenders decide my auto loan interest rate?” https://www.chase.com/personal/auto/education/financing/auto-loan-interest-rate
- [14] Consumerfinance.gov. “What is a loan-to-value ratio in an auto loan?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-to-value-ratio-in-an-auto-loan-en-769/
- [15] USAA.com. “Understanding APR and how it affects your car loan.” https://www.usaa.com/inet/wc/advice-auto-understanding-APR?akredirect=true
