When shopping for a new car, there are several things to consider, and how you’ll pay for it is one. If you are planning on financing your vehicle, it is important to understand the rates available to you.
The APR is one of the major aspects of an auto loan. The rate you get determines the total amount you’ll pay during the loan term. Finding a good APR may save you a considerable amount of money over time.
So, what’s a good APR for a car? Keep reading to find out.
What is APR?
The APR, or annual percentage rate, is the interest rate charged for taking out a loan. APRs are often expressed as a percentage representing the yearly rate on borrowed money. However, APRs aren’t simply the same as the loan’s interest rate. Depending on the loan type, your APR may also include any fees or additional costs that come along with the transaction.
When determining the APR for a loan, such as an auto loan, lenders look at several factors: your credit score, debt-to-income ratio, and loan type. A car’s APR varies based on the lender and your credit report, which is the biggest determining factor.
How is APR Calculated?
APR is calculated by considering the loan amount, the interest rate charged, the length of time you have to repay the loan, and other additional costs, such as origination fees. The good news is that you don’t have to calculate the APR yourself. The Truth in Lending Act requires lenders to tell you everything about the costs associated with your loan, including the details of the APR being offered to you.
It’s important to note that, depending on your loan terms, your APR can change after taking out a loan. The primary reason for this is the type of APR you pick when applying for a loan 一 variable APRs are subject to change from time to time, while fixed APRs are set for the term of the loan. Also, if you pay off or refinance your loan before the end of the loan term, your APR could change.
How Does It Differ from Interest Rate?
Many people think that APR and interest are the same, but it depends on the type of financial product. Understanding the difference between the two will give you a better idea of the overall cost of the loan.
For installment loans like auto, student, mortgage, and personal loans, the APR and interest rate may be the same if there are no additional fees you need to pay before taking out a loan. For example, in a situation where you need to pay an origination fee for a loan, the APR will be higher than the interest rate.
On the other hand, APR and interest rates remain the same for credit cards because they do not account for card fees.
How Can a Good APR Save You Money?
Understanding your APR gives you a clearer picture of what a loan will actually cost you, and getting a better APR may help you save money. A good APR for a car loan could mean lower interest rates, leaving more cash for other financial obligations.
Additionally, if you get a low APR for a car and choose a shorter loan term, you may keep even more extra money in your pocket. The less time you take to pay off the loan, the less time you allow the interest to accrue.
What Affects an APR for Car Loans?
Several factors go into determining APR for auto loans. Some of the most common factors include:
Length and Loan Type
The length and the type of loan you take have a significant impact on the APR you’ll pay. Long-term loans often have higher rates than those repaid within a short period of time. This is because lenders consider longer loans riskier.
Your Desired Car
The make, model and year of the car you want to purchase are also contributing factors to the APR you’ll pay. Generally, vehicles with higher resale values may lead to higher APRs.
Used vs. New Car
The APR for purchasing used and new cars varies significantly. New vehicles tend to have lower APRs than used ones because they are less expensive to finance. Lenders charge higher APRs on used vehicles due to their increased risk of mechanical failure. The high APR acts as a cushion for the lender since it’s difficult to evaluate the exact value of a used car.
Your Credit Score
Your credit score is by far the biggest determining factor for APRs. The higher your credit score is, the lower the APR you will get. If your score is above 750, you can expect lower rates, and lenders will be more willing to give you a loan. Lenders are more hesitant to lend to individuals with bad credit since they’re considered higher-risk borrowers who might default on loan repayment.
Average APR Based on Credit Score
The average auto loan rate varies based on your credit score. According to Experian’s 2021 fourth-quarter State of Automotive Finance market, here are the average interest rates for new and used cars across five credit levels.
| Credit Score Range | Average APR for New car | Average APR for Used Car |
| 300-500 | 12.53% | 19.87% |
| 501-600 | 9.41% | 15.96% |
| 601-660 | 6.07% | 9.80% |
| 661-780 | 3.51% | 5.38% |
| 781 and above | 2.47% | 3.61% |
As you can see, excellent credit is advantageous as you get lower APRs regardless of whether you’re buying a new or used car.
Ways to Obtain a Good APR
Here are three different ways to get a lower APR:
Improve your Credit Score
As mentioned above, your credit score is one major determining factor for APR. If you want a good APR, improve your credit score to 750 or above. Here are several practical steps you can take to boost your credit score faster:
- Pay bills on time
- Keep your credit utilization rate low
- Pay down outstanding debt, such as credit card debt and revolving lines of credit.
- Limit how often you apply for credit
- Lower your debt-to-income ratio
Shop Around
APR for car loans varies by lender. That’s why it’s good to shop around first and compare rates from different lenders. This way, you can be sure to get a rate that perfectly fits your current financial situation.
You can get a car loan from a bank or credit union or directly from a car dealer. However, many dealerships often charge high rates.
