What Factors Affect the Average Car Loan Interest Rate?

About 85% of new car purchases in the U.S. are financed, so if you’re thinking about taking out an auto loan, you’re not alone. Shopping for the right car loan is just as important as shopping for the right car. There are many factors you may want to consider when comparing different loans, including the interest rate.

The interest rate is the amount the lender is charging you to borrow money. It is expressed as a percentage of the principal, which is the amount of money you are borrowing. The lower the interest rate, the less you will pay over the course of your loan. 

Interest rates change all the time. However, the interest rate you are offered on your car loan can vary depending on many different factors. What factors will impact your car loan interest rate? How can you secure the best interest rate possible? Here’s what you want to know:

What Factors Could Impact Your Car Loan Interest Rate?

A number of factors could impact the interest rate on your car loan, including:

• Credit Score
• Down Payment
• Term of Loan
• Lender
• Used vs. New Car
• Market Conditions

Credit Score

You probably know that your credit score can impact your eligibility for an auto loan, but you may not realize that it can also affect your car loan interest rate. This is because your credit score tells your lender how risky it is to lend you money. 

During the application process, the lender will perform a credit check to evaluate your creditworthiness. If you have a high credit score, this indicates that you have a history of paying your debts, so you are viewed as a low risk borrower. If you have a low credit score, this indicates that you have had trouble managing your debts in the past, so you are a riskier borrower.

Borrowers with high credit scores typically qualify for lower interest rates than borrowers with low credit scores. In other words, borrowers with high credit scores can save a significant amount of money by qualifying for loans with lower interest rates. 

Down Payment 

Your down payment is the amount of money you are paying upfront toward the price of your car before financing the rest. 

For example, if you are purchasing a car for $20,000, you may make a down payment of $5,000, which means you would only need to borrow $15,000 to cover the cost of the vehicle.

The size of your down payment is another factor that can impact your car loan interest rate. If you make a small down payment, the lender may view you as a high risk borrower, which means you may not qualify for the best interest rates. 

However, if you make a sizable down payment, you are viewed as less of a risk, so you may be able to secure a better interest rate. 

If you aren’t making a down payment, you can still secure a better interest rate if you trade in your current vehicle and put the proceeds toward the purchase of your new car.

Term of Loan

Your loan term can impact your interest rate. A loan term is the amount of time you are given to pay off your loan. Most auto loans have terms that range from 24 months to 72 months, or two to six years. Over the last decade, the average car loan term has increased at a steady rate. Right now, the average is about 70 months, or just under six years. 

In general, the longer the loan term, the higher the interest rate. This is because the longer the term, the more your car’s value will depreciate. This opens the door to the possibility that at some point, you may owe more on your vehicle than it is worth. This makes loans with longer terms riskier for lenders, which is why they charge higher interest rates. 

Lender

A number of different lenders offer auto loans, including banks, credit unions, online lenders, and even auto dealerships. When choosing which type of lender to work with, it’s important to remember that your decision could impact your loan’s interest rate.

Some lenders typically offer higher interest rates than others. For example, taking out an auto loan at the dealership may be more convenient, but it could cost you more money over the course of the loan. This is because dealerships typically offer higher interest rates than banks and credit unions, so you will end up paying more in interest.

Online lenders and credit unions, on the other hand, tend to offer the best interest rates on car loans.

Used vs. New Car

The type of car you plan on purchasing, specifically whether you are buying a new or used car, could also impact your interest rate.

Interest rates are generally higher on loans for used cars. This is because used vehicles are older, less reliable, and less valuable than newer vehicles, so they carry more risk for the lender. For these reasons, many lenders will not issue loans for used cars that are over 10 years old. Some lenders will not issue loans for used cars at all.

If you are purchasing a used car, the age of the vehicle could impact your interest rate. The older a car is, the more risk it carries for the lender. In other words, the older the vehicle is, the higher the interest rate on your loan. 

Market Conditions

Some factors, such as the current market conditions, are completely out of your control. Interest rates are higher when the economy is strong and lower when the economy is weak. If you’re thinking about buying a car in the near future, keep an eye on the market conditions and wait for a period where interest rates are low. 

How to Find the Best Car Loan Interest Rate

Now that you know some of the many factors that could impact your car loan’s interest rate, it’s important to learn how to find a car loan with the best interest rate possible. Follow these tips:

• Check your credit. Pull your credit report to see where you stand. If your credit score is low, you may want to spend a few months improving it before you take out an auto loan. During this time, do not miss any debt payments or take out any new lines of credit. 
• Shop around. Take advantage of the fact that lenders typically offer free auto loan quotes. Request quotes from multiple lenders so you can compare interest rates and select the loan that is best for you.
• Wait for the right time. If the national interest rate is high and you’re not in a hurry to purchase a car, you may want to wait until the economy has slowed down to apply for a loan. Interest rates tend to drop when the economy cools off, so being patient could save you a significant amount of money.

Keep these tips in mind when you are ready to buy a new or used car so you can secure the lowest interest rate possible on your car loan.