What is a good interest rate and APR for a car loan?
Quick insights
- Interest rates and annual percentage rates (APRs) both indicate the cost of borrowing, but APR includes fees and prepaid expenses.
- Your credit score, loan terms and the vehicle you choose may impact the interest rate you receive.
- Improving your credit score or negotiating fees might help you secure a more favorable APR on your car loan.
When it comes to purchasing a vehicle, there’s a lot you may want to consider, such as what make and model you’d like, what gas mileage you need and so on. But figuring out how to finance your next vehicle purchase may be a helpful step in the process. When you’re comparing car loan options, you’ll see two terms—interest rate and APR. These both give you an idea of how much it costs to take out a car loan.
We’ll show you the difference between APR and interest rate and share some related tips.
Understanding APR and interest rate
While a loan’s interest rate and APR may look similar, there are some key differences you may want to understand before you finance a car. An interest rate is the percentage banks charge you for borrowing money. When you make monthly payments on a car loan, your payment will go toward both your principal balance and your interest charges.
When you finance a car, the APR is the total cost of interest, fees and prepaid expenses expressed as an annual rate over the life of the loan. Because it includes the cost of certain prepaid charges, APR can give you a better picture of how much you’re actually paying for a car loan.
What determines your interest rate on a car loan?
Interest rates are not the same for every person and are determined based on several factors. Here are some of the things that may affect your interest rate when financing your vehicle:
- Credit score: Typically, the higher your credit score, the lower your interest rate may be. That’s because a high credit score indicates that you may have a history of paying debts on time, making you a potentially less risky borrower. To check your credit score, you might consider using online tools that can help you keep track and learn more about it.
- The vehicle: The vehicle you purchase may also affect your rate. New vehicles tend to have lower interest rates, while used vehicles usually have a higher interest rate.
- Loan term: Longer loan terms tend to have higher interest rates than short-term loans. While a short-term loan may require higher monthly payments, it might save you money on interest in the long run.
- Lender: Interest rates vary by institution, so you may want to compare offers from several lenders to find competitive rates. You might also consider financing through the vehicle manufacturer, whose rates may differ.
- Market conditions: Broader economic factors and market conditions can influence the baseline interest rates available to consumers. When national rates rise or fall, auto loan rates typically follow suit.
- Lender policies: Each lender has its own internal policies and risk assessments that dictate the rates they offer. Because these guidelines vary, the rate you qualify for might differ significantly from one institution to another.
What is a good interest rate on a car?
An ideal interest rate on a car loan is the lowest one you can get, but you might consider watching out for fees that will drive up your cost. With a lower interest rate, you could save on the total cost of the car loan and pay lower monthly payments.
Ways to get the best car loan interest rate
- Improving your credit score: Taking steps to help raise your credit score, such as paying bills on time or keeping credit card balances low, may help you secure a lower interest rate.
- Choosing a shorter loan term: Asking for a shorter loan term may lower your interest rate since you’ll be borrowing for a shorter period. If you can afford the higher monthly payments, this could decrease your overall financing costs.
- Getting a cosigner: If you have a poor or no credit history, getting a reliable cosigner might make lenders view you as less of a risk, potentially leading to a lower rate. However, you may want to be cautious, as your relationship could be harmed if you default on the loan.
What determines your APR on a car loan?
APR accounts for both your car loan interest rate and the cost of any financing fees and prepaid expenses. The Truth In Lending ActOpens overlay (TILA), a federal regulation, requires lenders to disclose the APR on your vehicle purchase before you sign a loan agreement. An example of a prepaid expense would be an origination fee.
- Interest rate: Your interest rate usually makes up the biggest part of the total APR on your vehicle. Lowering your interest rate may help you get a more favorable APR.
- Origination fees: A loan origination fee is the amount you pay upfront to cover the cost of processing your loan. These fees can be a small percentage of your loan amount or a flat fee.
- Down payment: Making a larger down payment can help reduce the total amount you finance, which might help you secure a lower APR.
What is a good APR for a car loan?
An ideal APR on a car loan is typically the lowest one you can qualify for. Because APR includes both the interest rate and additional fees, a lower APR means you are paying less overall for the cost of financing. While APRs can vary widely depending on several factors, securing a lower rate may help reduce your monthly payments and total loan cost.
Strategies to lower your APR on a car loan
Since interest rates make up a big portion of your total APR, everything mentioned above to help lower interest rates can help lower your APR. But there are other things to consider as well, like:
- Shopping around: Comparing offers from multiple lenders may be a helpful way to find a competitive APR.
- Looking for special offers: Some dealerships may offer special rate deals or promotions on newer vehicles to incentivize buyers.
In summary
When shopping for a vehicle, it may be helpful to understand the difference between your interest rate and your APR. While the interest rate is the percentage charged for borrowing money, the APR provides a more complete picture by including fees and prepaid expenses. Factors like your credit score, loan term and the vehicle you choose can all influence your rates. By shopping around, improving your credit score and negotiating fees, you may be able to secure more competitive financing for your next car.
