Editor’s Note: We earn a commission through affiliate links on Forbes Advisor. Commissions do not influence the opinions or evaluations of our editors.
Shopping for a new car can be both stressful and exciting as you get closer to buying your dream vehicle. A good way to facilitate this process is to know how much you will pay if you need a loan to buy a car. Fixing a good Annual Percentage Rate (APR) will save you money over the life of your loan and potentially help you get more car for your money.
What is an APR?
Every car loan has an APR, which is the annual fee that the lender charges for borrowing money. It is slightly higher than the base rate that comes with the loan, as it includes fees for the maintenance of the loan, such as title documentation and taxes, dealer preparation, and other fees associated with the transaction.
The higher the APR, the more you repay to the lender over the term of the loan. That is why it is important to look around for the loan.
How a lender determines my APR
A car loan is covered by the vehicle being financed. How much you pay for that loan, the APR, depends on a number of factors, including:
- Creditworthiness: Your credit score is an important factor in determining the interest rate you will get on a car loan and the APR in general. The higher your credit score, the more likely you are to get a lower rate.
- Deposit: Having a down payment helps reduce the amount of the loan you have to borrow and thus the total cost of the loan.
- Vehicle type: Whether the vehicle is new or used plays a vital role in the APR you pay. In general, new vehicles tend to have a lower interest rate than used vehicles. Also car brands with a track record of reliability, such as Toyota or Honda, contribute to the resale value of the model and can result in a lower APR.
- Personal stability: Having proof of stable employment shows the lender that you have the income to repay the loan, giving you a better APR. Lenders are also more favorable to a borrower who has lived at the current address for some time.
What is a good APR based on my credit score?
To get a good baseline of your APR, let’s start with the average rate for a car loan based on certain credit score ranges. Car buyers with excellent credit scores ranging from 780 to 850 were able to get new car loans at an average rate of 2.47%. Conversely, buyers with the lowest credit scores from 300 to 500 saw average rates of 12.53%, according to Experian. Here is the breakdown of interest rates based on credit scores for the purchase of new and used vehicles.
Buy a car loan
There is no shortage of lenders vying to lend you money for the car of your dreams. And that includes a wide range of conditions and rates for car loans. Here are the three most common types of auto lenders.
1. Online Lenders
The easiest place to start is through an online search where you will quickly discover the myriad of online lenders to choose from. You can easily find their estimated rates and terms along with payment calculators online.
2. Financial Institutions
While searching online is a good place to start, gather more in-depth information by visiting or pre-applying online with a financial institution, such as your local bank or credit union. Start your search online or call directly and speak to a loan officer or car loan expert.
Ask if they offer pre-approvals to take to the dealer as this will give you an accurate estimate of how much you are qualified to borrow and at what APR. It also gives you stronger bargaining power with the dealer.
3. Car Dealers
Car dealers can offer quick and easy financing for all types of buyers through partnerships they have with car financing companies. While it may seem easier to let the car dealer do the loan for you, it’s recommended that you also research the rates and terms yourself before going in to make sure you’re getting the best deal possible.
How do I know I have a good APR?
To find out which APR is best for you, the chart above will give you a good idea based on your credit score, combined with shopping online for current rates from lenders.
You can also negotiate all kinds of rates and terms when you’ve limited your lenders, or lower your APR by making a higher down payment or improve your credit score before applying for a loan.
Compare rates and save on your car loan
Receive up to 4 loan offers on myAutoloan.com in minutes.
How can you improve your APR?
The best way to improve your APR takes time and discipline. If your credit translates into a higher APR on a car loan, consider building a history of paying your bills on time and reducing some or all of your outstanding debts.
Once you’ve built a track record of consistent, on-time payments for debts such as credit cards, rent or mortgage, and public utilities, you’re likely to see an increase in your credit score. This will result in lower, more favorable APRs, which can save you money.
With APRs and fees varying from lender to lender, it’s important to shop around and compare quotes before taking out a loan. Do the due diligence beforehand and find the lender that best suits your financing needs to get a loan, and a car that best suits your needs.