What Are the Average Car Loan Interest Rates by Credit Score?

What Are the Average Car Loan Interest Rates Based on Credit Score?

If you are looking for a car, you are probably considering the interest rate on your car loan. Your vehicle loan interest rate is determined by your credit score. According to the Car Finance Market Experimental State Report, the average interest rate on car loans for new cars in the first quarter of 2023 was 6.58 percent - 11.70 percent for used cars.

In general, the lower your score, the higher your annual percentage rate (APR). However, you don't need a perfect score to get a good GPA. To find the best car loan rate, it's wise to shop around and work to improve your credit score if it's not in great shape.

Average car loan interest rates depending on credit score

Lenders put your interest rate first on your credit score. But you can still get a good rate without top-tier credit.

To get an idea of how much of a difference a high credit score can make, and where your interest rates might end up, it's helpful to look at average rates by credit score.

Personal FICO Score     Average interest rate on new car loans     Average interest rate on used                                                                                                                                                   car loans

781-850                                     5.18%                                                         6.79%

661-780                                     6.40%                                                         8.75%

601 to 660                                 8.86%                                                         13.28%

501 to 600                                 11.53%                                                        18.55%

300 to 500                                 14.08%                                                        21.32%

Factors affecting car loan interest rates

While your credit score plays a huge role in determining your interest rate, there are other factors to consider as well.

Credit Score

The two most common scores used when underwriting a car loan are FICO and VantageScore. Both account for several measures of financial health, including payment history, credit utilization, credit mix, and average age of accounts.

There are some differences in the number of scales used and their weights. But both scores lie between 300 and 850. As the chart shows, the best prices go to buyers with scores in the mid-60s and up.

Instead, lenders may employ an auto industry-specific scoring system, such as the FICO Auto Score, which runs from 250 to 900. These scores take into account the same factors but give more weight to risk factors associated with the possibility of repaying the auto loan.

Lender

Different lenders have different standards for credit underwriting. Everyone will consider your credit score, income, and debt-to-income ratio, but lenders vary in what they accept. Some may also consider your education or professional experience.

Outside of eligibility and underwriting criteria, some lenders offer lower rates than others.

Borrowed amount

Consider both the value of the car and the down payment in the loan amount. If you don't want to bid more than required, the lender may see this as an increased risk and increase the interest rate to compensate.

Loan term

Generally speaking, the longer the loan term, the more interest you will have to pay when the interest is due. But, aside from the extra interest, lenders can charge higher interest rates on longer loans. This is because the lender's risk has increased. Prices may increase over time, which means that opportunities for higher profits may be missed. Moreover, the longer the term of the loan, the higher the probability that part of it will not be repaid in full.

Economic and market conditions

While the primary factors that will determine your auto loan interest rate are your credit history and loan details, there are broader market factors that play a role as well. When interest rates are high, the Federal Reserve said, borrowing money costs borrowers more. As a result, you may end up with a higher interest rate.

The Fed's current target interest rate range is 5% to 5.25%, with a range of 2.25% to 2.50% in 2022. As a result, interest rates for the average auto loan have gone up. If the Federal Reserve lowers interest rates in the coming months, auto loan rates are likely to drop as well.

How to Get the Lowest Car Loan Interest Rate

Regardless of your credit score, there are several ways to improve your chances of getting a competitive interest rate.

Shopping around: Shop around with several lenders, including banks and credit unions, and compare interest rates on auto loans. Not all lenders report to the credit bureaus, so if you're trying to build your credit, make sure you choose one that does.

Apply for pre-approval: It's a good idea to apply for pre-approval with at least three lenders before settling with one of them. You will be required to give some personal and professional information. Pre-approval requires a hard draw, which will temporarily drop your score by a few points, so it's best to keep the 14-day application deadline so you only get 1 ding.

Make a larger down payment: The down payment reduces the amount you need to borrow. By reducing the amount borrowed, the lender takes less risk. Lesser interest rates result from lesser risk.

Get a co-signer: If you have a low credit score, consider asking a trusted family member or friend with an excellent credit score to sign for your auto loan. Your co-signer will assume the loan if you can't pay it back, which means less risk for the lender. Keep in mind that it may strain your relationship if you are unable to pay.

Where to find the best auto loans

There are many methods that you can use to find the best car loan.

Banks. If you already have a banking relationship and a solid credit history, your bank may offer attractive interest rates.

Credit unions. Like a bank, if you're a member of a credit union, they can offer competitive interest rates. If you have less-than-perfect credit, the credit union may be willing to go over that and still offer you a better rate than you can get from other lenders.

Online lenders. Many online lenders offer auto loans, usually with fast approvals and a pre-qualification process that doesn't require a solid credit draw. As with most direct lenders, you will likely get a better rate by applying with an agency.

Car dealers. This is one of the biggest ways you can get stuck with a higher rate of interest. Dealers add an excess to the interest rate offered, which means you could be stuck paying more than if you went directly to the lender. Check with several different lenders before visiting the dealership to get the best deal.

Bottom Line

Low auto loan rates are usually reserved for the borrowers with the best credit scores. While you are not guaranteed to get numbers that match your credit bracket, keep this in mind when shopping for a good deal.

Whether or not you know your credit score, you can pre-qualify with online and offline lenders to see what types of rates you qualify for.