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The length of the loan you’re looking for also affects your interest rate. They charge more interest to protect themselves and recoup more of their money in case the loan goes into default. If you default on a used car loan, the lending company will be left with a lower-value asset to sell. Used-car loans have a higher interest rate than new-car loans because used cars have a lower resale value than new cars. Other factors that impact your auto loan rate are the type and length of the loan. All of these factors indicate that a borrower has trouble managing money. Factors that can contribute to a low credit score include things like being late on loan payments and other bills, having a high level of debt, or failing to repay loans. Lenders perceive people with low credit scores as less likely to pay back the money they borrow. You can read more about how financing a car works and check out our guide to car loans and leasing for more details. It allows the lender to make a profit and get more of their money back if you default on a loan. The interest is basically rent on the money you borrow.

When you finance a car, you borrow the amount of money you need to buy the car, and the lender charges you interest. If you have a good credit score, you’ll qualify for a lower interest rate. When the federal reserve keeps interest rates low, borrowing money to buy a car tends to be less expensive.Īfter rates set by the Federal Reserve, your credit score has the most impact on the car loan interest rate you’ll pay. Why Is My Auto Loan Interest Rate So High?Ĭar loan rates are driven by two main factors: borrowing interest rates set by the Federal Reserve and your credit score. Buyers with poor credit get an average interest rate of 17.29%, and pay $6,985 in interest, which is more than twice as much as what someone with better credit would pay in interest. Borrowers with fair credit and an average interest rate of 15.36% would pay $7,020 in interest over the life of a five-year loan. People with good credit have an average rate of 9.37% this month, which results in total interest of $4,101. Borrowers with top-tier credit and this month’s average rate of 6.34% will pay interest of $2,712. Let’s take a look at a loan on a used car. Use our car loan calculator to find out how much you'd pay for a loan. That’s about $9,500 in added costs compared to what someone with better credit would pay. At 17.04%, the average new-car interest rate we found for people with poor credit, the total interest comes to $14,182. Borrowers with fair credit have an average interest rate of 15.11% this month, and this loan would cost $12,039 in interest. People with good credit have an average interest rate of 9.12% this month, resulting in $7,171 in interest with this loan. Using the average interest rate for people with top-notch credit, 6.09%, that works out to $4,679 in interest payments. We’ll use a loan term of five years and a new-car loan amount of $28,800 (which is the amount left to finance after a 20% down payment on the average price of a new car at $36,000).

Let’s look at the different auto loan rates above and see how they impact your bottom line. Powered By Why Does a Low Car Loan Rate Save Me Money?