What Is the Average APR for a Car Loan?

When you search “average APR for car loan” you’ll be met with some statistics, but they mean nothing without an understanding of your own financial situation and how car loans work. The average APR for a car loan for a new car for someone with excellent credit is 4.96 percent. The average APR for a car loan for a new car for someone with bad credit is 18.21 percent. So, there’s certainly a wide range of APR for car loans and it’s important to know where you’ll fit before starting the car buying process.

APR stands for “annual percentage rate” and refers to the percent of a loan that will be charged to the borrower yearly for the financing of the loan. So, you pay back the money you borrow over the life of your loan, but you also pay interest on that money, an amount which is determined by the APR of the loan.

What Affects an APR for Car Loans?

It’s important to know and understand your credit score before researching car loans. Credit is the main factor, according to NerdWallet.com, in the lender’s determination of your interest rate, or APR. Simply put, bad credit equals a higher APR and good credit equals a lower APR. Some lenders won’t even offer a loan at all to someone with bad credit. The type of car you are interested in also affects the APR for a car loan. Generally, new cars offer lower APR loans while used cars offer a bit higher.

The basic scale for credit scores is:

Bad: 300-629
Fair: 630-689
Good: 690-719
Excellent: 720-850

People with bad credit scores, typically anything below 630, will likely face difficulty being approved for a loan and high interest rates if they are approved. This is because lenders see these borrowers as risky or more likely to default on their loans than those with better credit. When a borrower defaults on a car loan, the lender repossesses the vehicle and then sells it. However, they may lose money in the sale. Because of this risk, the financing of the loan costs more.

Borrowers in the fair and good categories with scores in the mid to high 600s will probably be able to secure a low but will pay a little more interest than those in the excellent category. Borrowers with a score of 700 or above enjoy some pretty low interest rates. The APR offerings get even lower if your score is above 750, but not by much. Basically, it pays off to pay off your debts and do so on time. The higher your score, the less likely lenders are to see you as a risky borrower.

Examples of APR for Car Loans With Different Variables

As of January 2020, U.S. News reports the following statistics for average auto loan rates:

Excellent (750 – 850): 4.93 percent for new, 5.18 percent for used, 4.36 percent for refinancing
Good (700 – 749): 5.06 percent for new, 5.31 percent for used, 5.06 percent for refinancing
Fair (650 – 699): 11.30 percent for new, 11.55 percent for used, 7.82 percent for refinancing
Subprime (450 – 649): 17.93 percent for new, 18.18 percent for used, 16.27 percent for refinancing
Deep Subprime (449 or less): 25.05 percent for new, 25.30 percent for used, 19.47 percent for refinancing

Why Do Average Interest Rates Vary for Loans for New and Used Vehicles?

Usually, the interest rate for a loan for a used car is going to be a little more than one for a new car because used cars can be viewed as less reliable than new cars. Finder.com shows that certain banks won’t even approve a loan for a car that’s older than 10 years or has a very high amount of mileage. The lender sees such vehicles as a risk because they are more likely to breakdown, making it difficult or impossible for the borrower to continue paying back the loan.

For example, a bank might offer a 3.74 percent rate for a new model but up that rate to 4.24 percent for a 2008 model even if it’s the same price. Used cars are usually less expensive than brand new models, so you may face a higher interest rate, but still save money in the long run. Longer auto loan terms on older models are typically not allowed for fear that the car won’t make it to the end of the payment calendar.

Average Rates for Auto Loans by Lender

Even with a solid credit score and a decided type of car, you’ll want to shop around for your auto loan. Average APR for car loans varies from lender to lender. Here are some example rangers of rates according to Value Penguin.

Affinity Plus: 2.49 – 11.49 percent
Alliant: 2.24 – 18.49 percent
CapitalOne: 3.24 – 24.99 percent
Chartway Federal: 1.24 – 13.74 percent
PenFed: 1.49 – 18 percent
PNC Bank: 2.29 – 6.04 percent
Wells Fargo: 3.99 – 24.24 percent

Capital One and LightStream are two unique lenders. An auto loan with Capital One is attractive to borrowers thanks to several benefits they offer. This lender doesn’t approve loans for vehicles older than 2006 but will approve a loan as low as 3.24 percent and as high as $40,000. LightStream car loans are popular, according to TheSimpleDollar.com, for their quick approval of requested loans. However, you need a very high credit score to be approved for these loans.

How Does a Low APR Save Me Money?

A shorter loan term with a low APR is the best option for a financially beneficial car loan. The less time is spent paying off the loan, the less time there is for interest to accrue so a two to five year loan is ideal. Lenders also offer lower APR with shorter terms because the borrowers will take less time to repay the loan. A high APR paid even over a short loan term will quickly add up. Longer loans can provide lower monthly payments, but cost most in the long run.

A five-year loan at $28,800 with a 4.96 percent APR will accrue $3778 over the life of the loan. The same loan amount and term with an 11.93 percent APR will accrue $9577. For borrowers in the deep subprime credit ranking, that same loan amount and term with an APR of 23.81 percent will cost them $20,721 in interest over the life of the loan. Therefore, a low APR can save over $15,000 throughout the term of a car loan.

Sources:

https://www.valuepenguin.com/auto-loans/average-auto-loan-interest-rates

https://cars.usnews.com/cars-trucks/average-auto-loan-interest-rates

Best auto loan interest rates

https://www.nerdwallet.com/blog/loans/best-car-loans-for-good-fair-and-bad-credit/

https://www.thesimpledollar.com/loans/auto/best-auto-loans/