What Is the Average Interest Rate on a Car Loan?

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Buying a car is one of the most fun and exciting things that you can do. But it’s also an enormous financial commitment. Very few people can afford to buy a car with cash, which means they need to finance the car through a lender with an auto loan.
When you finance a car, you essentially have a lender buy it for you, and then you slowly pay it off with payments to the lender. But to make it worth their while, banks make you pay interest, so that they make money on the process.
But how much interest do you have to pay? That depends on a lot of factors.

What is the average interest rate on a car loan?

According to a report from Value Penguin, the average interest rate for a 60-month loan is 4.37 percent. A 60-month loan is the most common loan length, but if you’re interested in different loan lengths, the average interest rate for a 36-month loan is 4.21 percent, the average interest rate for a 48-month loan is 4.31 percent, and the average interest rate for a 72-month loan is 4.45 percent. This will go up or down based on a number of factors, which will affect both your interest rate and the amount of your monthly payment.

What is the range of potential interest rates on a car loan?

There are a lot of factors that impact the auto loan interest rate on a car purchase, which means that there’s a wide range of potential interest rates that you can pay. In general, the average range is 3 to 10 percent for interest rate. However, it’s not unheard of for some car loans to sneak under 3 percent, and if you’re in a poor financial situation with bad credit you could find yourself with an interest rate well above 10 percent, perhaps even as high as 20 percent auto loan rate.

What impacts the interest rate on a car loan?

For most lending companies, an interest rate is determined by an algorithm, and every company has their own algorithm. In the long run, the best way to ensure a low APR is to maintain a good credit score, because the most impactful element of determining an interest rate is your credit score. If you have good credit or excellent credit reflected on your credit report, then you’re almost guaranteed to have a very low interest rate when purchasing a car. Similarly, if you have a really poor credit record, you will undoubtedly end up with a higher interest rate and less favorable loan terms. The lender needs to know that they’ll be making money off of you, so they’re going to charge you extra if you’re a financial liability to protect the risk.
Similarly, your current financial situation plays a role in determining your interest rate. If you make a large amount of money and have limited financial obligations, chances are you can get a relatively low interest rate. But if you live fairly close to your means, you’re less likely to get a good rate.
The lender also plays a role, as some lenders simply have lower interest rates. Sometimes you get what you pay for, but sometimes it’s just a matter of certain companies being willing to give you a better annual percentage rate. As previously mentioned, the length of the loan also is a factor, with shorter loans having lower interest rates, since they’ll be paid off more quickly, and a longer loan term having a less favorable average APR.
Last but certainly not least, the age and quality of the car can impact auto loan interest rates. The car is a risk that the lender is assuming, so they’re going to take into account the vehicle you’re purchasing.
All in all, there are a lot of different factors that determine your interest rate, but the average car buyer has a rate in the low to mid 4 percent range for a new car loan of 60 months.

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