The car shopping process can be less than transparent. Just when you thought you got a handle on a vehicle's purchase price, you're sent to the Finance and Insurance office where you're offered an APR rate that seems just as ambiguous. Whether you're just starting the car shopping process or comparing multiple auto loan offers, you should familiarize yourself with the variables that determine car loan rates. We'll look at how factors like a car buyer's credit score, loan term, and vehicle type impact the average APR to help you shop and finance smarter. 

APR Rates by Credit Score

checking credit score for car loan
There is a 10% difference between the average APR for the lowest and highest credit score range.

A car shopper's credit score carries the most weight for lenders when they approve or deny the auto loan and it also plays the biggest role in determining the APR rate offered. Two major credit scores (FICO and VantageScore) rate consumers' credit histories using a range between 300 and 850.

The 5 factors that impact credit scores include payment history, amount of debt owed, length of credit history, mix of credit accounts, and new credit inquires. The credit score is a numerical representation of the risk the lender takes on by issuing a loan to the borrower so the higher the score, the lower the interest rate. 

APR credit score tableSource: Business Insider

It's no surprise that the lowest APR went to the super prime credit group and the subprime group got the highest rate, but the difference in the cost to borrow is eye-opening. Experian data shows that car shoppers with the lowest credit scores paid more than 10% more to borrow than those with the highest scores.

When looking at the difference in monthly car payments, shoppers with super prime credit paid an average of $337, while deep subprime shoppers paid $412. Over the course of a year, the higher APR ads up to $900 more in financing costs and over a 60-month car loan, the deep subprime borrower pays $4,500 more.   

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APR Rates by Loan Term

Car loan APR calendar

The loan term, or the amount of time you have to pay off the auto loan, will impact your APR rate with shorter loan terms offering lower rates. Although not as drastic as good credit vs. bad credit, this variable can make a significant difference when the loan term is stretched to over 60-months long.

Keeping factors like credit scores and vehicle type consistent, the average APR on a 36-month $25,000 new car loan is 4.11%, while the average for a 72-month term jumps to 4.49%. As automakers offered 0% financing deals for as long as 84-months during the height of the COVID-19 pandemic, consumers took advantage and stretched their car loans up to 7 years. 

APR by Loan termsSource: Business Insider

In addition to a .38% increase in the average APR rates for a long-term loan, there are other risks to consider before signing onto an auto loan over 60 months. The higher overall cost of financing the auto loan puts borrowers at risk of overpaying by hundreds or thousands of dollars, going underwater on the loan (owing more on the vehicle than its worth), and falling into a cycle of debt.

APR Rates for New vs. Used Cars

woman test driving used car
That used car may look like a great deal but it'll come with higher APR rates.

There's no denying that buying a used car instead of new comes with its share of perks. In addition to a lower price tag, a used car allows you to avoid taking a big depreciation hit (new cars can depreciate 20% once driven off the dealership). When it comes to auto financing, on the other hand, new cars offer the better deal.

new car vs. used car financing
New cars are 3.73% less expensive to finance than used. (Business Insider).

According to Experian, the average auto loan interest rate in the last quarter of 2019 was 5.76% for a new car and 9.49% for a used car. The rationale behind the premium for used car loans once again comes down to risk. The collateral of a used vehicle comes with more risk to the lender than new. The condition of used cars is much less predictable, and repairs are typically not covered by the manufacturer. If the vehicle becomes undrivable, the borrower is less likely to pay off the loan.

How to Get the Best Possible Auto Loan Rate

car loan application approved
Auto lenders have different APR minimums, so it pays to shop around.

In addition to credit scores, loan terms, and vehicle types, APR rates can vary based on the lender. Car shoppers can finance their vehicles directly through the dealership's F&I office or shop around with banks, credit unions, or online lending companies. All of these lenders set their own minimum APR rates, so it pays to shop around.

Car shoppers with excellent credit scores can take advantage of low-interest financing rates offered by many automakers right now, while those with compromised credit need to do some research to find the best possible interest rate.

Lender options for shoppers with bad credit include credit unions, subprime lenders, and buy-here-pay-here dealerships. The best way to shop around is to get pre-approved for financing before going to buy your car. Getting pre-approved allows you to compare rates from multiple lenders and choose the best option. 

Get Pre-Approved for a Car Loan Today