When you’re shopping for a new (or new to you) car, you want to get the best deal. Part of that deal includes your interest rate and APR.
Maybe you’ve seen dealerships advertising “low rates for well-qualified borrowers.” But what is a good APR on a car loan? And how can you qualify for a low rate? In this guide, we’ll explain the difference between APRs and interest rates and how to figure out what is a good interest rate on a car loan, so you’re ready to negotiate for the best deal.
What is an APR and interest rate?
When shopping for a car loan (or any type of loan), keep in mind that advertised interest rates aren’t the same as the loan’s annual percentage rate (APR).
The interest rate refers to the annual cost you pay each year to borrow money, expressed as a percentage.
The APR is also expressed as a percentage, but it’s higher than the interest rate because it includes interest as well as fees. Your APR can include:
- The interest that accumulates before your first loan payment
- Origination fees
- Sales tax and registration fees
- Extended warranties and services contracts
- Any other costs you roll into the loan
The Federal Truth in Lending Act (TILA) requires lenders to disclose the APR in every consumer loan agreement, as it gives the borrower more information about what they’re really paying. Since all lenders must follow the same rules to ensure the APR’s accuracy, you can use the APR as a good basis for comparing loan offers.
Good APR & interest rates for car loans
Two important pieces of information can help you figure out the interest rate you’re likely to receive when you start shopping for a car: your credit score and whether you plan to purchase a new or used car.
Like most loans, the lowest rates on a car loan are usually reserved for borrowers with high credit scores, so it’s a good idea to check your credit score before car shopping. Then you can figure out where your credit score falls.
Each quarter, Experian publishes a State of the Automotive Finance Market report  Experian. “State of the Automotive Finance Market”. - Accessed July 8, 2021 https://www.experian.com/automotive/auto-credit-webinar-form on the average loan rate for different credit score ranges across the U.S. in the previous quarter. Those credit score ranges are as follows:
|Super prime||781 – 850|
|Prime||661 – 780|
|Nonprime||601 – 660|
|Subprime||501 – 600|
|Deep subprime||300 - 500|
Next, figure out whether you want a new car or a used car. Typically, the interest rates available on a loan for a used car are higher than the rates available on new cars because used cars are less reliable – and thus worth less – than new cars.
In fact, some lenders won’t even approve loans for cars that are more than ten years old or have very high mileage. This is because lenders see these vehicles as risky. After all, they’re more likely to break down, which could make it difficult for the borrower to continue paying back their loan.
What is a good APR for a new car?
According to Experian, for the first quarter of 2021, the average loan rates by credit score range were:
|Category||Average loan rate|
|Super prime (781 – 850)||2.41%|
|Prime (661 – 780)||3.54%|
|Nonprime (601 – 660)||6.64%|
|Subprime (501 – 600)||10.81%|
|Deep subprime (300 – 500)||14.66%|
What is a good APR for a used car?
For used cars, the average loan rates by credit score range were:
|Category||Average loan rate|
|Super prime (781 – 850)||3.71%|
|Prime (661 – 780)||5.54%|
|Nonprime (601 – 660)||10.43%|
|Subprime (501 – 600)||17.26%|
|Deep subprime (300 – 500)||21.07%|
The rate you’ll be offered can vary from lender to lender, so it’s important to shop around to ensure you get the best deal — even if the first offer you receive is lower than average for your credit score range.
Impact interest rates have on your loan
When you finance a new or used car, your monthly payment goes partly toward paying down the loan principal and partly toward interest and fees. So the higher your interest rate, the higher your monthly payment will be.
To illustrate, say you want to borrow $20,000 to buy a used car. Your credit score is 658 — just a few points away from the “prime” category — and you’re wondering if it’s worth it to take steps to build your credit before taking out the loan to qualify for a lower rate.
Let’s assume you’d qualify for a 10.43% rate with your current credit score and a 5.54% rate if you were able to boost your credit score by a few points. Here’s how your monthly car payment and total cost of borrowing would change, based on a 60-month loan term.
|5.54% Rate||10.43% Rate|
|Estimated monthly payment||$382||$429|
|Total interest paid||$2,944||$5,751|
The difference between a $382 monthly car payment and a $429 monthly car payment is only $47 per month. But over the course of a 60-month car loan, the higher interest rate would cost you a whopping $2,807 in interest.
Factors that determine your APR
We’ve already mentioned how your credit score and the choice of new versus used affect the interest rate you’ll pay on a car loan. But other factors can influence the interest rate and APR you’ll get on a car loan, as well.
- Income and employment. Your income and employment history can affect the rate you’ll receive on a car loan. Lenders see having a full-time job and stable employment history as a sign that you’ll be able to manage your monthly car payment.
- Loan term. Long-term car loans typically have higher rates than shorter-term loans. They’re riskier for the lender because there’s a greater chance that the loan will outlast the vehicle.
- Down payment. Dealers and other lenders may be more willing to negotiate lower rates for customers who trade in their old vehicle or make a substantial down payment because it shows you’re serious about the purchase.
- Where you get the loan. You can get car loans from banks, credit unions, dealerships, and online lenders. Rates can vary greatly between different types of financing.
- The fees you roll into the loan. When you purchase a car from a dealership, the total contract cost is always higher than the price you negotiate on the car. That’s because the contract includes various fees and taxes. Some of those fees are negotiable and some aren’t. Edmunds has a helpful article on the fees you should pay when buying a new car  Edmunds. “What New Car Fees Should You Pay?” - Accessed July 8, 2021 https://www.edmunds.com/car-buying/what-fees-should-you-pay.html.
Things you can do for a lower interest rate
Lowering your interest rate and APR by even a small amount can significantly reduce the total cost of buying a car. Here are a few things you can do to qualify and negotiate for a better rate.
Check your credit report and credit score
Before applying for financing, get a free copy of your credit report. Review it for errors or inaccuracies that might lower your credit score and dispute them if necessary.
You may also want to check your credit score. If your score is close to the next highest tier, you may want to take steps to improve your score by a few points and improve your chances of qualifying for a lower rate.
Find a cosigner
If you have bad credit (or no credit), applying with a creditworthy cosigner can strengthen your application and help you qualify for a lower rate. Just keep in mind that a cosigner will be on the hook for the loan if you stop making payments.
Shop around with several lenders and get pre-approved before visiting the car dealership. If the dealer really wants your business, they may try to beat your pre-approved rate.
Consider a shorter loan term
Shorter loan terms usually have lower monthly payments than longer-term loans because they spread your loan out over a longer period. However, long-term loans usually have higher interest rates. Opting for a shorter loan period can help you qualify for a lower rate and ensure you’re paying interest over a shorter period, both of which can reduce your total cost of borrowing.
Make a larger down payment
When the amount you want to borrow is significantly less than the value of the car you’re buying, the lender may be willing to charge a lower rate because the loan is less risky. Making a larger down payment (or trading in your existing vehicle) will lower the loan-to-value ratio and help you qualify for a lower rate.
Negotiating with a salesperson can feel intimidating, but it’s necessary if you want to get the best deal. Negotiate the price of the car, the value of your trade-in, the interest rate, and any fees included in the contract.
You don’t have to have excellent credit to get a car loan — although it does help. Take time to consider your options, shop around, compare interest rates, and negotiate for the best deal. Then be sure to make your monthly car payment on time, which could help your credit score and ensure you qualify for a good rate in the future.
-  Experian. “State of the Automotive Finance Market”. - Accessed July 8, 2021 https://www.experian.com/automotive/auto-credit-webinar-form
-  Bankrate. “Auto loan calculator” - Accessed July 9, 2021 https://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx
-  Edmunds. “What New Car Fees Should You Pay?” - Accessed July 8, 2021 https://www.edmunds.com/car-buying/what-fees-should-you-pay.html