What is Considered a Good Interest Rate On a New or Used Car Loan?

Interest rates substantially impact the cost of borrowing when you finance a new or used car purchase. But what interest rate levels are considered good or competitive in today’s auto lending environment? This guide examines current rate averages, prime and subprime lending tiers, and tips for securing the best financing rate based on your credit standing.

What Is a Good Interest Rate on a Car?

Do Lenders Compete on Rates for Excellent Credit?

Borrowers with credit scores over 750 will see lenders competing aggressively on interest rate offers. This is because:

  • Their credit profile carries less default risk
  • They have more negotiating leverage
  • Lenders want to poach business from rivals
  • Small rate differences really sway prime borrower choices

Those with excellent credit should shop around between multiple lenders to force interest rate bidding and maximize savings. Even fractions of a percent lower is significant money annually.

How Often Do Auto Loan Rates Change?

Auto loan interest rates evolve based on:

  • The Federal Reserve federal funds rate
  • Overall credit market conditions
  • Lending competition and risk appetite
  • Default and delinquency trends

Rates remain steady for months, but can see larger shifts quarterly or annually. Watch for rate trend forecasts from lenders.

Should I Lock In an Auto Loan Rate When Approved?

If you've been pre-approved for an auto loan at a certain rate, locking it in as soon as possible is wise to avoid hikes. A rate lock ensures:

  • The loan closes at the committed percentage
  • The predictable payment amount carries certainty
  • Sudden rate surges before purchase don't increase costs

Consult lenders on current rate lock windows and get the rate locked for peace of mind.

How Much Difference Does Each Rate Point Make?

Every interest rate point on a $25,000, 60 month car loan equals:

  • 1% rate = $42 monthly payment difference
  • 2% rate = $85 monthly payment difference
  • 3% rate = $127 monthly payment difference

The savings add up exponentially over a 5 year loan period. Fight for the lowest possible rate.

How to Get the Best Interest Rates

Tips for Getting the Best Car Loan Rate

To obtain the lowest rate:

  • Shop lenders including banks, credit unions, online lenders
  • Secure pre-approval and compare rate offers
  • Review loan estimates for the true interest rate
  • Optimize your credit score and credit report
  • Reduce debt obligations and secure collateral like home equity
  • Make a larger down payment if possible

Having options, leverage, and excellent credit maximize your rate advantage.

Impact of Interest Rates on Your Car Loan

Do Auto Loan Rates Vary by Location?

Interest rates are primarily based on:

  • Your creditworthiness
  • Loan amount
  • Loan term
  • Down payment

So rates don’t vary much based on location or specific state. Credit profiles and loan factors determine pricing more than geographic region.

FAQs on Good Car Loan Rates

What rate is too high to accept on a car loan?

Any rate higher than 10% should be scrutinized closely for potential issues or easy rate improvement through credit unions or online lenders.

How much does the loan length impact the rate?

Going from 60 to 72 months can increase rates around 0.5%. Over 84 months can mean 1% higher rates.

Should I pay points to lower the interest rate?

Paying points only makes sense if you keep the loan long enough to recoup the upfront fee through lowered interest. Do the math carefully.

Does the vehicle model influence rates at all?

Lenders may adjust rates mildly based on if they will finance older, high mileage vehicles. But the variation is minimal between standard models.

Can dealers mark up rates above what I'm approved for?

Yes, dealers often try increasing the loan APR from your approved offer to pad their profit. Reject any inflated rate.

Key Takeaways on Good Car Loan Rates

  • Excellent credit (740+) gets the lowest rates from 3-7% APR
  • Used car loans are 1-2% higher than new cars
  • Compare multiple lender rates through pre-approval
  • Lock in pricing once approved to avoid hikes
  • Make a large down payment when possible
  • Avoid rates above 10% as too expensive

Understanding market rate averages and negotiating from a position of strength makes securing the best interest rate possible far more achievable.

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