Auto loan rates for new and used vehicle purchases jumped in late 2023 to 7.18% and 11.93%, respectively, both 15-year highs, according to Experian. Though persistent inflation in the U.S. economy has heightened APRs, you could qualify for a lower rate based on your credit scores. If you have excellent credit, you may even qualify for a rate under 5% on a new car loan. However, if your scores are below 500, you may receive a rate of 18% or higher, if you qualify at all.

We’ll examine how your credit scores impact the interest rate you receive on an auto loan, plus explore how to receive the best rate possible for your situation.

Average car loan interest rates by credit score

The average auto loan interest rate in the third quarter of 2023 was 7.18% for new vehicles and 11.93% for used vehicles, according to Experian. However, the rate you receive on a car loan will depend on your credit scores. The higher your scores, the lower your auto loan rate.

When you apply for an auto loan (or any form of consumer debt), your lender reviews your credit profile to assess how responsibly you repay debt. If you have low scores, the lender’s risk increases because you appear more likely to default on the loan. They offset this risk by offering a higher rate.

Here’s a look at the average auto loan rates received by borrowers in the fourth quarter of 2023, broken down by FICO credit score range:

The cost difference between a good credit loan and a bad credit car loan can be staggering.

Example: Let’s say your credit score is 780 and you qualified for a five-year new car loan for $30,000 with a rate of 6.00%. Your monthly dues would be $580 and you’d pay $4,799 in interest charges over the life of the loan.

If your credit score is closer to 550, that same five-year loan may come with a rate of 12.00%. In this case, your payments would jump to $667 per month and you’d pay $10,040 in total interest — $5,241 more.

Average car loan rates by state

Your credit scores, plus overall auto market conditions, are the primary factors determining your auto loan’s interest rate — but where you live can also play a part. Various state laws require taxes or fees that can drive up your APR, and the strength of your local economy can also impact rates.

Minnesota, Nebraska, South Dakota and Wyoming had the lowest average APRs for new car loans in February 2024, while the Alaska, Georgia and Nevada had the highest average rates, according to Edmunds data. Here’s a look at the average auto loan interest rates for new vehicles by state:

Used car rates similarly vary by state, but the trends don’t always align. The lowest average used car rates in February 2024 were found in Maine and Washington, while Alabama, Hawaii and Mississippi were among the highest.

Where are auto loan rates heading?

The fourth quarter of 2023 showed a few bright spots, with lower APRs becoming available for longer loan terms and more new vehicles selling with promotional 0% financing. However, the average APR on both new and used vehicles hit record highs of 7.18% and 11.93%, respectively, according to Experian, so financing a vehicle is still an expensive proposition for most buyers.

Auto loan rates are expected to stop rising and possibly start descending in 2024, but they’ll likely remain elevated in comparison to recent years (alongside the broader interest rates environment). The Federal Reserve has held the federal funds rate in the 5.25% to 5.5% range since last July, and Wall Street expects the Fed to lower it by about one percentage point over the course of 2024.

Even if rates are generally stagnant in 2024, vehicle prices are expected to come down amid recovering inventories, which will increase buyers’ borrowing power.

Factors that impact your auto loan interest rate

Your credit isn’t the only factor that auto loan lenders consider. Lenders assess the following criteria when determining your eligibility and auto loan rate:

• Credit scores: Higher credit scores typically result in lower interest rates, while lower scores lead to higher rates or difficulty securing a loan at all.
• Credit profile: Lenders may also evaluate other aspects of your credit, including your payment history, the length of your credit history and the amount of debt you owe compared to your income (your debt-to-income ratio). These details communicate your creditworthiness and ability to comfortably repay the loan.
• Loan term: Generally, shorter-term loans tend to have lower interest rates than longer-term loans because the lender assumes risk for fewer years.
• Amount borrowed: Some lenders have specific rate tiers based on loan size — the larger the loan, the greater the risk, and therefore, the higher the rate.
• Down payment: Though buying a car with no down payment is possible, forking one over reduces the loan amount, which may lead to a lower interest rate since lenders tend to view smaller loans as less risky. Plus, if you’ve already invested a substantial amount in the car, you’re less likely to default and risk repossession.
• Market rates: When the Federal Reserve increases or decreases its target interest rate, banks and lending institutions follow suit. The Fed rate affects lenders’ borrowing costs, and then lenders pass those costs on to borrowers.
• Vehicle: Newer vehicles or those with lower mileage often qualify for lower rates. “Since a newer vehicle is considered to have a lower risk of breakdowns, lenders don’t need to worry as much about someone abandoning the loan when they encounter repairs they cannot afford,” said Mark Beneke, a California-based auto sales manager.
• Lender: Finally, different lenders have their own underwriting criteria and policies that impact the exact interest rates you’re offered.

6 ways to get a better car loan rate

Working to qualify for a low interest rate can pay substantial dividends — you can potentially save thousands of dollars over the life of the loan. Here are a few steps you can take to receive a lower rate:

1. Improve your credit scores

Start by checking your credit reports and scores. You can request free weekly copies of your credit reports from the major credit bureaus at AnnualCreditReport.com. If you find errors that could be damaging your credit (like debt payments incorrectly marked as late), dispute them with the reporting bureau (Equifax, Experian or TransUnion).

Your credit reports won’t contain your scores, but they may be available through your financial institution or credit card issuer. There are also many third-party sites that charge fees for access to your scores.

Work on improving your credit scores before applying for a car loan. It won’t happen overnight, but paying your bills on time, reducing outstanding debt and correcting errors on your credit reports will help your scores increase over time.

2. Shop around

Receiving multiple quotes can help you zero in on the loan with the lowest rate and best terms. Comparison shop with credit unions, banks and online lenders — the more quotes you receive, the more leverage you have to negotiate. The auto dealership’s financing offer is unlikely to be the most competitive, but the salesperson may be willing to match your in-hand offer to win your business.

Apply for auto loan preapproval with various lenders by providing information about your identity and income. You’ll have to agree to a hard credit pull to receive an offer, which can cause your credit scores to temporarily drop by about five points, according to FICO. If you submit all of your applications within a 14-day window, the major credit bureaus will count them as a single, rate-shopping event, minimizing the impact to your scores.

3. Consider a shorter loan term

The length of your auto loan can impact the rate, so choose your term wisely. Shorter loan terms, like two or three years, often have lower interest rates than longer terms. While your monthly payments will be higher, you’ll pay less in interest over the life of the loan.

When comparing auto loan offers, use an auto loan calculator (like this one from Calculator.net) to understand how your loan term impacts your overall cost of borrowing.

4. Make a larger down payment

Reducing the loan amount by offering a sizable down payment also reduces the risk for the lender — a substantial down payment is seen as a form of good faith, a sign that you’re less likely to default on the loan. Less risky loans often come with lower interest rates.

5. Use a cosigner or co-borrower

If you have a limited credit history or poor credit scores, using a creditworthy cosigner can help you get a lower rate. Your cosigner’s strong credit reduces the lender’s risk because two parties are responsible for loan repayment.

If you decide to use a cosigner, be sure they understand the risks and are comfortable with the agreement. Your personal relationship could suffer if you miss payments, and your cosigner’s credit will also be harmed.

6. Explore refinancing

If you already have a car loan with a high interest rate, consider refinancing to a lower rate, if possible. You might be able to secure a better rate if your credit scores have improved or market interest rates have dropped since you first borrowed.

Keep in mind that auto loan refinancing only saves you money if you keep your term length about the same. Extending the term might help lower your monthly payments, but you’ll end up paying interest for a longer period, which will likely cancel out any savings you’d enjoy from the lower rate.

Where to find the best auto loans

You can get auto financing through traditional lenders (like banks and credit unions), online lenders or even through your dealership or car manufacturer. This gives you many options to compare to find the best auto loan rate possible.

• Credit unions: Because of their nonprofit status, credit unions often charge lower rates and impose fewer fees on auto loans than traditional banks do. Plus, interest rates charged on any federal credit union loan are capped at 18% under the Federal Credit Union Act.
  However, credit union membership is required to receive a loan — some institutions have open membership policies, while others require members to belong to the local community or work in a certain industry.
• Banks: If you already have a relationship with a bank, you may receive a loyalty rate discount on your auto loan. Banks offer the security and reliability of working with a longstanding financial institution, but credit requirements and interest rates may be higher than with other lenders.
• Online lenders: These digital-only institutions may have more flexible credit requirements than traditional banks. They may also offer more favorable rates and fees due to their lower overhead costs. You can complete applications and get approved quickly online, and you can usually get pre-qualified beforehand without a hard credit pull. However, online lenders lack the in-person service you’ll find at banks or credit unions.
• Dealer-arranged financing: This is likely the simplest and most streamlined way to secure an auto loan, but it may not be the cheapest. Instead of shopping around for a loan yourself, the dealer will work with its network of lending partners to secure loan offers for you. This may even include lenders that work with bad-credit borrowers. But interest rates on dealer-arranged loans are typically higher, as they often include a cut for the dealer.
• Captive financing: Vehicle manufacturers like Ford, GM, Toyota, Honda and others have financing arms that provide loans for their brands’ vehicles, known as “captive financing.” You can often find low promotional interest rates, cash rebates or other special financing offers through captive financing — but you’ll likely only qualify for a deal if you have excellent credit and steady income. Because automakers are motivated to move vehicles, bad credit borrowers may be able to get financing through a captive lender, though rates can be high.

Additional reporting by Colin Hogan