Auto Loan Rates

There are many variables to consider when shopping for auto loans. In addition to how much you can afford and how much a lender approves for a loan, you should also consider the auto loan interest rate.

Auto Loan Rate Variables

The first thing to understand is that auto loan rates are based on many factors. Different lenders have different rates, so you should always shop around to see what range exists for your particular situation. Some of the most important variables that impact auto loan rates are:

  • Your credit score.
  • Whether the car loan is for a new or used car.
  • The size of the loan compared to the value of the car.
  • The length of the auto loan term (e.g. 36 vs. 60 months).
  • How well you negotiate.

Average Interest Rate

With auto loan interest rates constantly fluctuating, it is hard to pinpoint an exact average rate for car loans.

That said, you can generally expect to pay somewhere around a 3% interest rate for a 60-month auto. If you have a good credit score, you probably can find a lower rate by going to a credit union or to another lender you have a relationship with, like your insurance company. If you have bad credit, the rate is going to be a lot higher.

Reducing Your Risk

Lenders don't like risk. Anything you can do to reduce the risk of defaulting on your loan is good, and can mean getting the best car loan rates available.

A couple factors that can work in your favor are:

  • Having good credit. This is one of the biggest signs that you are not a high-risk borrower.
  • Making a high down payment. Putting over 20% down shows your lender that you are committed to investing in your car.

Negotiating Your Interest Rate

One car interest loan rate variable that has nothing to do with risk is how well you negotiate. Some car loan lenders will negotiate their rate. This is especially true when getting a loan from a dealer who will also be trying to sell “extras" during the closing, such as warranties.

The best thing you can do is get prequalified for your car loan before you shop for your car. This allows you to focus just on getting the best deal on your loan, so you can then just focus on getting the best deal on your car. It also means that if the dealer wants your business, they will have to match or beat the offer you already have.

Annual Percentage Rates

The annual percentage rate, or APR, is the rate of interest you pay on the money borrowed (or financed). This is where your focus should be when negotiating with a lender. Sometimes people make the mistake of negotiating the monthly payment instead of the interest rate.

The monthly payment is based on the interest rate AND the length of the loan. You can lower it by extending the loan—but this also means making more interest payments in total.

Beware of Financing Offers

Often, you will be offered deals that seem too good to be true, such as “0% financing" on your new car. While this sounds like a deal, it's important to read the fine print.

The following are some common scenarios to watch out for:

  • This kind of offer is often reserved for those with very good credit.
  • Sometimes it's only good for the first few months, and then the interest rate kicks in—or the loan lasts an extra six months on the back end.
  • Other times the car dealership makes up for the loss on the 0% financing offer by keeping the price of the car and any extras high.

As long as you walk into the dealership educated and prepared, you should be able to walk away with an auto loan rate that doesn't break your bank.

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