What is a Good Interest Rate for a Car?

A good interest rate for a car loan is generally one that is at or below the national average for your credit score tier, ideally reflecting the rates offered to borrowers with excellent credit. This typically means a single-digit percentage rate, especially for new car loans.

Understanding What Makes an Interest Rate "Good"

What constitutes a "good" car loan interest rate isn't universal; it largely depends on several factors, primarily your creditworthiness and the current economic landscape. However, for a new car loan, anything below 6% is often considered very good, especially if your credit score is strong. For those with excellent credit, rates can be as low as 5.25% or even lower, reflecting favorable lending conditions.

Key Insight: Your credit score is the most significant determinant of the interest rate you'll qualify for. Lenders assess your credit history to gauge the risk of lending to you. A higher credit score signals lower risk, leading to more favorable interest rates.

For instance, in 2024, the average new car loan interest rate for a buyer with an excellent credit score is around 5.25%. In contrast, borrowers with poor credit scores might face average rates significantly higher, such as 15.77% for a new car. This wide disparity underscores the importance of a healthy credit profile.

Factors Influencing Car Loan Interest Rates

Beyond your credit score, several other elements play a crucial role in determining the interest rate you're offered:

• Credit Score and History: As highlighted, this is paramount. Lenders use your FICO Score or VantageScore to assess your credit risk. Learn more about your credit score at Experian.
• Loan Term (Length of Loan): Shorter loan terms (e.g., 36 or 48 months) typically come with lower interest rates because the lender's risk is reduced over a shorter period. Longer terms (e.g., 72 or 84 months) often have higher rates, though they result in lower monthly payments.
• New vs. Used Car: New car loans generally have lower interest rates than used car loans. This is because new cars depreciate slower initially and are less of a risk for the lender.
• Down Payment Amount: A larger down payment reduces the amount you need to borrow, which can lower the lender's risk and potentially lead to a better interest rate.
• Current Market Conditions: Broader economic factors, such as the federal interest rate set by the Federal Reserve, influence overall lending rates. When these rates rise, car loan rates tend to follow suit.
• Lender Type: Different lenders—banks, credit unions, online lenders, and dealership financing—offer varying rates. Shopping around is crucial. Credit unions, for example, often offer competitive rates.

Average Car Loan Interest Rates by Credit Score (Illustrative)

While specific rates vary, here’s a general idea of how credit scores impact average auto loan interest rates:

Note: The specific average rates of 5.25% for excellent credit and 15.77% for poor credit (new car, 2024) fall within these broad categories and highlight the range.

How to Secure a Better Car Loan Interest Rate

To increase your chances of getting a "good" interest rate, consider these strategies:

1. Check Your Credit Score: Know where you stand before you apply. You can often get free access to your credit score through your bank, credit card company, or services like MyFICO.
2. Improve Your Credit Score: If your score is not ideal, take steps to improve it, such as paying bills on time, reducing debt, and correcting any errors on your credit report.
3. Shop Around for Lenders: Don't just rely on the dealership's financing. Apply for pre-approval from multiple banks, credit unions, and online lenders. This allows you to compare offers without committing.
4. Get Pre-Approved: Pre-approval gives you a clear idea of how much you can borrow and at what rate, putting you in a stronger negotiating position at the dealership.
5. Make a Larger Down Payment: The more money you put down upfront, the less you need to borrow, which can result in a lower interest rate.
6. Choose a Shorter Loan Term: While this means higher monthly payments, a shorter term usually comes with a lower interest rate and less interest paid over the life of the loan.
7. Consider a Co-signer: If your credit isn't strong, a co-signer with excellent credit can help you qualify for a better rate.

By understanding these factors and proactively working to improve your financial standing, you can significantly increase your chances of securing a good interest rate for your next car loan.