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What’s a Good Interest Rate on a Car Loan?

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Austin Kilham

Austin Kilham

Updated July 21, 2021
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What's a Good Interest Rate on a Car Loan?; It's important to take the interest rate of your car loans into account. Learn how to tell if you're getting a good rate.
When you finance the purchase of a new or used vehicle with a car loan—or you refinance an old loan—your lender will charge you an interest rate. What that interest rate is, exactly, can have a major impact on how much you end up paying for the car.Your credit score plays a big role in what interest rate you can get. In 2021, the best average interest rate for car loans was 2.41% for super prime loans (meaning loans extended to borrowers with credit scores between 781 and 850), according to credit bureau Experian.The average rate available to people with credit scores of 661 to 780 (prime) was 3.54%; 6.64% for credit scores from 601 to 660 (near- or non-prime), 10.81% for credit scores of 501 to 600 (subprime); and 14.66% for credit scores from 300 to 500 (deep subprime).  That all works out to an (unweighted) average of 7.57%.Those are just averages, but the rate you actually receive will depend on a number of factors, from how much money you put down to how long you want to take to pay back the loan, as well as how high your credit score is. Rates will also vary depending on what type of vehicle you’re buying and whether you’re buying it used or new. Here’s a closer look at interest rates, the factors that influence them, and what you can do to get a better rate. 

What Is an Interest Rate?

At its most basic, an interest rate is the percentage of your principal (the amount of money you need to borrow) that lenders charge you to use their cash. (It is also what banks pay you when you save money with them. In that case, they are getting to use your money.) In the case of auto loans, interest charges are added to your monthly payments. These can be calculated in one of two ways: as simple interest or as precomputed interest. Simple interest loans calculate interest based on your current loan balance, and that amount is added to your monthly payment the day your payment is due. As your balance shrinks, the amount of interest you owe will shrink as well. For a car loan with precomputed interest, monthly interest rates are calculated at the start of your loan. The amount of money you pay toward interest is consistent each month.  Your interest rate can have a big impact on how much money you pay over the life of a loan. For example, if you took out a five-year $25,000 loan to buy a new car with a 2.5% interest rate, you’d end up paying $1,621.04 in interest over the life of the loan. If you took out the same loan but with a 6.5% interest rate, you’d pay $4,349.22 in interest over the life of the loan. Because your interest rate can have such a big effect, it’s important that you get the best rate you can. 

What Factors Influence Car Loan Interest Rates?

The interest rate a lender will offer you for an auto loan or refinance will depend on your credit score, your loan amount, and your loan term (the amount of time you’ll be paying off your loan), among other factors.Your credit score is a numerical expression of your credit history—a chronicle of the debts you carry and the payments you’ve made and missed. Generally speaking, lenders will offer you better interest rates the better your credit is. Scores typically range from 300 to 850, with 850 being the best. Most consumers have a credit score somewhere in the range of 600 to 750. Your score helps lenders assess how risky it is to loan you money. Scores on the lower end suggest that you’re not very good at managing your debts and may be at risk for missing payments. To compensate for this risk, lenders usually require higher interest. In 2021, consumers with the lowest credit scores, (those in the 300 to 500 range,) were offered an average interest rate of 14.66% on car loans compared to 2.41% for consumers with top scores from 781 to 850.  Your loan term can also have a big impact on the interest rate you’ll be charged and how much you pay over the life of the loan. Loans with short terms will usually have higher monthly payments, but you’ll likely pay less in interest over the life of the loan. Longer terms translate to more months of interest payment, increasing the amount you pay in the long run. What’s more, longer terms are also likely to come with higher interest rates. View the chart below for a more detailed look at the relationship between credit score, terms and interest rates. 
Finally, the bigger the down payment you can make on a car, the less you’ll typically pay in interest for the loan. When you have more skin in the game, lenders will see you as less of a risk, and your interest rate can improve. As a bonus, a smaller loan balance will mean you pay less interest over the life of the loan, saving you money. 

How Average Interest Rates Vary for New and Used Vehicles

Another one of the biggest factors in determining interest rate on car loans is whether you’re choosing to buy a used vehicle or a new one. Used car financing often comes with higher interest rates because used cars represent more risk to lenders, who generally expect you to use the cars as collateral. Used cars have lower starting values than new cars, and they are at greater risk of being totaled. In the first quarter of 2021, interest rates for used vehicles were 8.70% on average, with an average term of 65.74 months. To compare, the average interest rate for new cars was 4.12% with an average term of 69.5 months. Though on average, the gap between interest rates for new and used vehicles is about 4%, that gap narrows the higher a consumer’s credit score. 

How to Get a Good Interest Rate

The first step in getting a good interest rate is shopping around and comparing offers. Car loans can come from banks, credit unions, online lenders and dealerships, and each will offer slightly different rates and terms.  Putting more money down can help you lower your interest rate off the bat as well as decrease the amount you pay over the life of the loan. And improving your credit score can encourage lenders to offer you better rates, too. To try to improve your score, you might start by checking your credit report for any errors. Once a year you can pull your credit report free from each of the three major credit reporting bureaus—TransUnion, Equifax and Experian. When you spot a mistake, let the credit bureaus know immediately. Paying off debt and always making on-time payments are also behaviors that are likely to help. Finally, if you have an auto loan and your credit score has improved since you got it, you might be eligible for a loan with a better interest rate now and want to consider refinancing. When weighing the benefits of refinancing, be sure to consider additional costs like fees and prepayment penalties as well as the temporary effect it may have on your credit score. 

The Takeaway

In the first quarter of 2021, the best average interest rate for an auto loan was 2.41%, but that only applied to people with the highest credit scores. The interest rates you’re offered will vary depending on your financial circumstances. If you’ve got superb credit and you’re able to make a substantial down payment, you may qualify for the lowest interest rates out there. And if you don’t, there are steps you can take to help you achieve the best interest rate possible. Refinancing your auto loan with a better interest rate is always a possibility in the future. To learn more, visit Lantern by SoFi to compare rates and explore your options so you can find the loan that’s right for you.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0621109

Frequently Asked Questions

What is an interest rate?
What influences auto loan interest rates?
How do you find a low interest rate?

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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