What is the average interest rate for a car loan? Depends on credit score
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- The average new car interest rate was 4.07% and used car rates averaged 8.62% in the first quarter of 2022, according to Experian.
- Interest rates are largely based on credit score, whether the car is new or used, and loan terms.
- Average rates have fallen since the first quarter of 2021, from 4.15% for new and 8.82% for second-hand.
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The average auto loan rate for a new car was 4.07% in the first quarter of 2022, while the typical used car loan carried an interest rate of 8.62%, according to Market Status. car financing from Experian.
That’s down slightly from 4.15% for new and 8.82% for used car loans during the same period a year earlier.
Dealerships calculate your interest rate by taking into account many factors, including your credit score, the type of car you’re buying, and where you live. Auto loans can be found through a dealership or by getting pre-approvals from institutions you’d like to work with, such as banks, credit unions, or independent lenders.
Data from Experian shows that the two most important factors on your auto loan interest rate are your credit score and whether you’re buying a new or used car.
Average Interest Rates by Credit Score Type for New and Used Car Purchases
Average monthly payment by credit score
The higher your credit score, the less it will cost you to borrow
Credit scores are a numerical representation of your credit history. They work like a score for your borrowing history ranging from 300 to 850, and include your borrowings, applications, repayments, and mix of credit types on your credit report. Companies use credit scores to determine how risky they think it would be to lend to you.
A lower credit rating makes borrowing more expensive. In the data above, the cheapest borrowing rates went to people with the best credit scores. Meanwhile, those with the lowest credit scores paid about 10 percentage points more to borrow than those with the highest scores.
The interest rate also has a big effect on the monthly payment. Using Bankrate’s car loan calculator, Insider calculated how much a borrower paying the average interest rate would pay for the same $30,000 new car loan over 48 months:
With the interest rate as the only factor changed, someone with a credit score in the highest category will pay $656 per month, while someone with a score in the lowest category would pay $831 per month. or $175 more per month for the same car.
Average interest rate for used cars compared to new cars
Buying used could mean higher interest rates
Buying a new car can be more expensive, overall, than buying used. However, interest rates for new and used car loans are very different, regardless of your credit rating. Based on data from Experian, Insider calculated the difference between new and used interest rates. On average, financing a used car costs about four percentage points more than financing new.
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The gap between the cost of financing a used car narrows as credit scores rise, but even for the best credit scores, a used car will cost more than 1% more to finance than ‘a new car.
Used cars are more expensive to finance because they are higher risk. Used cars often have lower values, plus a higher likelihood that they could be totaled in an accident and the finance company could lose money. This risk is transmitted in the form of higher interest rates, regardless of the borrower’s credit rating.
Read more: How to gift a car step by step
Average interest rates by loan term
Loans under 60 months have lower interest rates for new cars
Loan terms can impact your interest rate. In general, the longer your term, the higher your interest rate.
After 60 months, your loan is considered a higher risk and the amount you’ll have to pay to borrow spikes even more. The average 72-month auto loan rate is nearly 0.3% higher than the typical 36-month interest rate for new cars. This is because there is a correlation between longer loan terms and non-payment – lenders fear that borrowers with a long-term loan will eventually not repay them in full. Beyond 60 months, interest rates increase with each year added to the loan.
S&P Global’s data for new car purchases with a $25,000 loan shows how much the average interest rate changes:
S&P Global’s data for used car purchases with a $25,000 loan shows how much the average interest rate changes:
Although there is a direct correlation between a longer repayment period and a higher interest rate with new cars, this is not the case with used cars. It is unclear exactly why these rates drop with longer repayment terms.
It’s best to keep your auto loan at 60 months or less, not only to save on interest, but also to prevent your loan from becoming more expensive than your car, also known as underwater. As cars age, they lose value. This is not only a risk for you, but also for your lender, and this risk is reflected in your interest rate.
Average interest rates by lender
The lender you use makes a difference
When you start shopping around for car loans, you’ll find that the lender you choose makes a difference. Here are the starting interest rates from several different lenders for new and used cars.
Banks set their minimum auto loan rates independently, so it’s important to shop around and compare offers to see what works best for you. Get pre-approved from several different lenders and compare APRs and monthly payments to find the deal that’s right for you.