There are several factors that affect car loan interest rates, including your credit score, vehicle type, the length of the loan, and the amount of money you want to borrow. Additionally, different lenders may offer different loan terms based on their unique requirements and algorithms.
According to Experian’s State of the Automotive Finance Market Report, the average auto loan interest rate was 5.16% for new vehicle loans and 9.34% for used car loans as of Q3 2022.
Because loan terms are personalized for each borrower, it’s difficult to say what a good interest rate is on a car loan. Ultimately, the best loan interest rate is the lowest rate you can qualify for based on your personal situation.
Looking for an auto loan that works for you? Easily compare rates from lenders below.
How to Get the Best Car Loan Interest Rate
Buying a new or used vehicle can be a big expense, even if you finance the purchase with a loan. To get the lowest monthly payment, you should look for the lowest interest rate.
Here are some suggestions for getting the best interest rate on an auto loan.
Improve your credit
Your credit score has a significant impact on your loan terms. In general, borrowers with excellent credit qualify for the lowest interest rates, whereas borrowers with bad credit pay much higher rates.
Improving your credit score is one of the most effective ways to secure a low interest rate. Paying your monthly bills on time, monitoring your credit utilization ratio, and paying off outstanding debt are all ways to boost your credit score.
Get preapproved
Before you start car shopping, it’s a good idea to get letters of preapproval from a few different lenders.
Getting preapproved will show you how much money you can borrow, and at what interest rate. By getting multiple preapproval letters, you can see which lender can offer you the most favorable loan terms and the best interest rate.
Purchase a new car
Although new vehicles are more expensive to purchase, lenders usually offer better interest rates on new car loans.
In fact, you can sometimes find interest-free loans for new cars, especially if you have excellent credit. However, just because the interest rate is lower, doesn’t mean that a new car loan will be more affordable overall.
Get a co-signer
When you co-sign a loan, another person, like a friend or family member, agrees to take over your debt if you default on the payments. Having a co-signer isn’t always necessary, but it can help you get a lower interest rate, especially if you have bad credit. Also, students or people with no credit history will most likely need a cosigner for an auto loan.
It’s best to choose a co-signer who has good credit and a favorable borrowing history, which may help you get the lowest interest rate.
Research lenders
The first lender you come across isn’t necessarily the best one. Spend time researching various lenders, including online lenders, credit unions, and banks. Different lenders often use different criteria for setting interest rates, so getting multiple preapprovals can be beneficial.
Refinancing Auto Loans for a Better Interest Rate
Refinancing is another way to potentially get a better interest rate. When you refinance your car loan, you replace your current loan with a new one.
Usually, the new loan has a lower interest rate or a longer repayment period. Here are some examples of times when refinancing a car loan can be a smart financial decision.
Your credit score has improved
If your credit score has improved significantly since taking out your original loan, refinancing might be a good move. In this scenario, you can likely qualify for a lower interest rate, which may lead to lower monthly payments and less interest paid over the lifetime of the loan.
You can’t afford the payments
If your financial situation has changed and you can no longer comfortably afford your monthly loan payments, refinancing might provide some relief.
While you may not qualify for a lower interest rate, you could choose a new loan with a longer repayment period, which would reduce your monthly payments.
Interest rates have gone down
Most auto loans have a fixed interest rate, but the rates available can fluctuate due to economic factors. If auto loan interest rates have gone down since you initially took out the loan, you could refinance and lock in a lower rate. In this case, refinancing could help you save money on interest or pay off the loan in less time.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
