What Is the Average Car Loan Interest Rate in 2023?

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When buying a new or used car, your interest rate can significantly affect your monthly payments. But, what factors determine your interest rate, and how can you be sure that you’re getting the best interest rate for your new car?

lady buying car

How Your Credit Score Affects Car Loan Interest Rates

The biggest factor in determining your interest rate is your credit score. However, the credit score used by banks and credit unions for an auto loan can be different from the one you see from a third-party credit score provider. In addition, it can vary per lender, and lenders can score you differently depending on the financial product or service you require.

A typical credit score usually falls between a range of 300 to 850. The higher the number, the better your credit. You can purchase your FICO scores directly from FICO.

What is a FICO Auto Score?

The FICO Auto Industry Option is a credit score specifically marketed and sold to the automobile industry to determine your creditworthiness when purchasing a vehicle. It’s an industry-specific credit score used by the majority of auto lenders. FICO Auto Scores are available only to those in the auto industry. Consumers cannot purchase them.

A typical score ranges from 300 to 850, but a FICO Auto Score ranges from 250 to 900. While it’s impossible to know exactly what criteria FICO uses, Auto Scores weigh your credit history differently than the average credit score. It determines, with more accuracy, your likelihood to repay a car loan.

The FICO score isn’t much different from a typical credit score, but it is based on different standards. It focuses more on your ability to repay a car loan than, say, a mortgage or credit card.

If you have excellent credit, the FICO Auto Score won’t matter much when determining your rate. However, if you have average or poor credit, minor differences can make a big difference when lenders determine your interest rate.

Average Auto Loan Rates by Credit Score

Because FICO doesn’t share or sell the FICO Auto Score to consumers, it’s only possible to show the average auto loan interest rates using a typical credit score.

It’s not as accurate as the credit score used by those in the auto industry. However, it gives you a close approximation of the average interest rate when purchasing a car.

The FICO credit score range is from 300 to 850, and auto loan rates are slightly higher if you purchase a new car versus a used car. Below are the average auto loan rates for new and used cars based on each credit score range and a 20% trade-in or down payment.

CREDIT SCOREAVERAGE NEW CAR APRAVERAGE USED CAR APR
781-8502.96%3.68%
661-7804.03%5.53%
601-6606.57%10.33%
501-6009.75%16.85%
300-50012.84%20.43%

As you can see, your credit score can have a major impact on your interest rate when purchasing both new and used cars.

Those with very good credit, or “well-qualified buyers,” will have lower interest rates than those with average to poor credit scores. For instance, those with a credit score in the 601 to 660 range will pay close to 5% less than those in the lower bracket.

Used cars will have a higher rate because they are more likely to have mechanical issues or go underwater (they become less valuable than the amount of the car loan).

Keep in mind that these are averages, and actual rates will vary. The lowest right now for a new car is about 1.74%. The highest for a new car can hover around 24.9%.

Get Prequalified for an Auto Loan With Great Rates

Carvana

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  • Loan Term
    12 to 72 months
  • APR
    3.90 – 27.90%
  • Minimum Credit Score
    450

Carvana’s unique value proposition is that you can get a car loan, choose a vehicle, and buy a car all in one place. The company has a large selection of used cars you can choose from, and there is no minimum credit score to apply.

To get started, you’ll fill out a quick survey of what you’re looking for in a car. Carvana will then match you to several vehicles.

Once you’ve chosen a vehicle, they’ll run a soft pull on your credit to preapprove you for an auto loan. Once you finalize the loan application, Carvana will do a hard pull on your credit.

couple buying a car

5 Other Factors That Affect Car Loan Interest Rates

Credit scores have the most impact on auto loan rates, but lenders also consider other factors.

1. The Size of Your Down Payment

The down payment is the initial sum you pay upfront for the vehicle. It can have a profound impact on the interest rate you receive.

When you provide a substantial down payment, it decreases the loan-to-value ratio. By doing so, you borrow a lesser amount, thereby reducing the lender’s risk. As a result, lenders might offer more favorable interest rates because they’re more confident in your investment in the vehicle and your commitment to repay the loan.

A smaller down payment might result in a higher loan-to-value ratio. This means the lender is financing a larger portion of the vehicle’s value, which can be perceived as a higher risk. Consequently, the interest rate could be slightly higher to compensate for this increased risk.

In addition to potentially securing a lower interest rate, a sizeable down payment can also reduce the total interest you pay over the life of the loan, as the principal amount borrowed is less.

2. Loan Term

The duration of your loan can significantly affect the interest rate:

  • Short-term loans: Typically spanning 12 to 36 months, these loans come with higher monthly car payments. However, the silver lining is the potentially lower interest rates they offer, allowing borrowers to save money in the long run.
  • Long-term loans: Extending anywhere from 48 to 72 months or more, these loans can be tempting due to the allure of lower monthly payments. Yet, the catch lies in the higher interest accrued over time, which can make the overall loan more expensive.

3. Type of Vehicle: New vs. Used

The age of the vehicle you’re purchasing plays a pivotal role in determining interest rates:

  • New car loans: Fresh off the lot, new vehicles generally depreciate at a faster rate initially. Despite this, lenders tend to offer lower interest rates for new cars. Why? New cars often come with warranties and are less likely to face immediate mechanical issues, thereby posing a lower risk to financial institutions.
  • Used car loans: Older vehicles have already undergone a significant amount of depreciation. However, there’s a perceived higher risk due to potential wear and tear. This perception results in used car loans often having higher interest rates. It’s essential to consider the car’s age, mileage, and condition before taking out a loan.

4. Type of Lender

The source from which you secure your auto loan can also influence the rates:

  • Banks: Traditional banking institutions have a long-standing history in the auto loan market. If you have an established relationship or a solid credit history with a bank, you might be offered competitive car loan interest rates.
  • Credit unions: Operating on a member-based model, credit unions often provide more personalized loan solutions. Their non-profit status can lead to more attractive car loan rates, especially for members in good standing.
  • Dealership financing: While dealers can entice buyers with promotional rates or instant approvals, it’s crucial to be discerning. Sometimes, these loans come with clauses that might not be favorable in the long run. Always scrutinize the annual percentage rate (APR) and any associated fees.

5. Economic Conditions

The broader economic environment can’t be overlooked. Factors like inflation rates, federal monetary policies, and global economic events can all influence average car loan rates. By staying updated with financial news and economic forecasts, borrowers can gain valuable insights into potential rate shifts, ensuring they secure loans during favorable periods.

How to Get the Best Auto Loan Rates

Entering the world of auto financing? Securing the most favorable interest rate can save you a significant amount over the life of your loan. Here are some strategies to ensure you land the best possible rate:

1. Improve Your Credit Score

Your credit score is like a trust meter for lenders. The higher it is, the more confidence they have in your ability to repay your loan on time.

  • Regular check-ups: Just as you’d get a regular health check-up, your credit report needs periodic reviews. This can help you spot any errors or inaccuracies that might be pulling down your score.
  • Payment history: It accounts for a significant portion of your credit score. Always ensure you’re paying your bills on time. Setting up automatic payments can help prevent any oversights.
  • Debt management: High credit card balances or significant amounts of outstanding loans can negatively impact your score. Focus on reducing your debts, and you’ll likely see an upward trajectory in your credit rating.

2. Shop Around

Lenders are not created equal. Each one, whether it’s an online lender, a credit union, or a traditional bank, might offer varying interest rates based on their policies and the borrower’s profile.

  • Multiple quotes: Before settling on an offer, gather quotes from multiple lenders. This will give you a clearer picture of the market average and where the best deals lie.
  • Online lenders: The rise of online lenders has intensified competition in the lending market. They often have lower operational expenses and can offer competitive rates. However, always ensure you’re dealing with reputable online entities.

3. Consider Shorter Loan Terms

The allure of smaller monthly car payments with longer loan terms can be tempting, but there’s a trade-off.

  • Interest accumulation: A longer loan term, while reducing monthly payments, can result in you paying considerably more in interest over the life of the loan.
  • Short-term advantages: Opting for a shorter loan term might increase your loan payments, but you’ll often benefit from lower interest rates. Additionally, you’ll be free from your loan faster, giving you financial flexibility sooner.

4. Put More Down

The initial sum you lay down for your vehicle purchase can be a significant determinant in the interest rate you’re offered.

  • Lesser loan amount: A higher down payment reduces the amount you need to finance. This reduction can lead to more favorable loan terms and interest rates.
  • Risk reduction: Lenders perceive a larger down payment as a sign of commitment and a reduction in their risk. This perception can be advantageous for borrowers, as lenders might offer lower rates in response.

Getting Preapproved for a Car Loan Can Lower Your Rate

Getting preapproved for a car loan before you set foot on the dealership lot can have several benefits. First, you can compare offers from multiple lenders ahead of time to get the best auto loan rates. Check with banks, credit unions, and online lenders.

Those savings can translate to thousands of dollars over the lifetime of the car loan. Of course, you’ll also know in advance what your car budget will be.

A preapproved auto loan also gives you leverage when negotiating the price with the dealer. Car salesmen will see you as a buyer and not just a browser.

They’ll know you’re serious about purchasing a car, and it now becomes their job to make sure you buy a car from them. This can mean receiving discounts or incentives they otherwise may have left off the table.

You will likely get a lower auto loan rate and maybe even a better deal on the car loan if the dealership gives you a price break. This lowers the total amount of your car loan and the amount of interest you pay on your vehicle.

Refinance Your Car Loan for a Better Interest Rate

Not everyone can refinance a car loan, but for those who can, it’s a much easier process than refinancing other loans such as a mortgage.

If you’re upside-down on your auto loan, that is to say that the car is worth less than the current balance of the loan, then you likely cannot refinance. However, if that is not the case and you meet other criteria, you may want to consider refinancing.

If your credit score has improved since you made the purchase, it’s worth looking into a refinance. In addition, if interest rates have dropped since you took out your original loan, it may also be an excellent time to refinance.

Additionally, if your rate is above 6%, it can’t hurt to seek a better rate. It could lead to significant savings in your interest rate.

Tools to Help You Navigate Car Loan Interest Rates

In this ever-evolving digital age, we have a plethora of tools at our disposal that can greatly simplify the complex realm of car loan interest rates. By understanding and effectively using these tools, you can gain a competitive edge and ensure you secure the most favorable loan terms. Here’s how:

Online Calculators

Before even setting foot in a dealership or browsing cars online, it’s crucial to have an idea of what you can afford. Online auto loan calculators are invaluable tools for this purpose:

  • Forecast monthly payments: By entering your desired loan amount, term, and interest rate, these calculators can give you an estimate of your monthly car payments.
  • Adjust variables: Most online calculators allow you to adjust different variables, such as loan duration or down payment amount, providing you a range of potential scenarios.
  • Budget planning: Knowing potential monthly payments in advance can help you set a realistic budget, ensuring you don’t overextend yourself financially.

Rate Comparison Sites

The digital world has made it easier than ever to shop around without ever leaving your home. Rate comparison platforms are central to this:

  • One-stop shop: Sites like Auto Credit Express serve as a hub, presenting offers from various lenders based on the information you provide.
  • Transparent comparison: These platforms break down the offers, showcasing annual percentage rates (APRs), potential monthly payments, and any associated fees.
  • Personalized matches: Many comparison sites also offer personalized recommendations based on your credit profile and car preferences, guiding you toward lenders most likely to approve your application at favorable terms.

3. Credit Report Monitoring

Your credit report is essentially your financial report card, and it plays a pivotal role in determining your loan interest rate:

  • Regular reviews: Services that offer regular credit report monitoring can alert you to changes in your report, ensuring you’re always in the know.
  • Spotting inaccuracies: Errors in your credit report, whether due to identity theft or simple reporting mistakes, can significantly impact your credit score. Monitoring services help you identify these discrepancies quickly.
  • Disputing errors: If you notice inaccuracies, many monitoring services provide guidance on how to dispute them, ensuring your credit score reflects your true financial behavior.

Frequently Asked Questions

What is the average interest rate on a car loan?

According to Experian’s State of the Automotive Finance Market report for Q1 of 2023, the average auto loan interest rate is 6.58% for new cars, and 11.17% for used cars.

What are used car loan interest rates?

Interest rates for used car loans range between 8.13% and 20.12% at the current time of this writing. Auto loan interest rates vary depending on your credit score. Borrowers with the highest credit scores qualified for just over 8% interest rates.

Where can I get the lowest interest rate on a car loan?

Interest rates are constantly changing. It’s best to shop around at numerous sites to see what their current rates are. Here are our current picks for the best auto loans.

Can I get an auto loan with bad credit?

Auto loans typically come with higher interest rates if you have poor or average credit. However, there are some tactics you can use to reduce your interest rate or, at least, reduce the amount of interest that you pay.

See also: Auto Loans for Bad Credit

Is it helpful to have a cosigner?

If the option is available, consider a cosigner for your car loan. A close relationship with someone with better credit can help lower your rate and get you better terms on your loan by backing it for you. This can be a friend or family member such as a parent or spouse.

While there are benefits to having a cosigner, there are also drawbacks. The cosigner’s credit will likely take a hit from the hard inquiry on their credit report when helping you to secure a car loan. Furthermore, they’re liable for the total amount of the car loan if you default.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.