Car Loan Interest Rates Explained: APR, Factors, and Impact

Interest rate vs. APR: What's the difference?

When you compare car loans, you'll see two numbers: the interest rate and the annual percentage rate (APR). They are related but not identical. The interest rate is the cost of borrowing the principal, expressed as a percentage. The APR includes the interest rate plus certain lender fees rolled into the cost of borrowing. Because it includes those fees, the APR gives you a fuller measure of the total cost of the loan.

The Consumer Financial Protection Bureau (CFPB) advises that when comparing auto loan offers, you should focus on the APR rather than just the monthly payment, because the APR captures both the interest rate and any fees. For example, a loan with a lower interest rate but high fees could have a higher APR than another loan with a slightly higher rate and no fees.

Sources: Consumer Financial Protection Bureau, Bankrate

How lenders set your car loan interest rate

Lenders assess the risk of lending to you. Your credit score is a major factor, and higher scores generally qualify for lower rates. Your income and debt-to-income ratio also matter, though the evidence does not rank these factors. Additionally, the type of vehicle—new or used—affects the rate because used cars are riskier collateral. Used car loans typically have higher interest rates than new car loans, often 1 to 3 percentage points higher.

The federal Truth in Lending Act requires lenders to disclose the APR and other loan terms, so you can compare offers side-by-side.

Sources: Consumer Financial Protection Bureau, Bankrate, Investopedia, Certified AutoBrokers Inc.

How interest rates affect your monthly payment and total cost

Auto loans typically use simple interest, calculated daily based on the outstanding principal. Your monthly payment covers both interest and a portion of the principal. A higher interest rate increases your monthly payment and the total interest you pay over the life of the loan. The loan term also plays a crucial role: a longer term reduces the monthly payment but increases total interest paid.

The CFPB provides an illustrative example for a $20,000 loan at 4.75% APR. This example shows why it's important to consider both the monthly payment and the total cost over time.

Sources: Consumer Financial Protection Bureau

Typical rate ranges for new vs. used cars

Rates vary widely by credit score and vehicle type. According to Experian data from Q4 2024, as reported by Investopedia, average APRs for new car loans range from 5.18% for super prime borrowers (credit score 780 or higher) to 15.81% for deep subprime borrowers (score 500 or lower). For used car loans, the average APRs range from 6.82% for super prime to 21.58% for deep subprime.

These figures illustrate how much your credit score can affect your rate. Someone with a subprime score may see a rate about 10 percentage points higher than someone with excellent credit. Keep in mind that these are national averages and actual rates vary by lender and market conditions.

Sources: Investopedia, Bankrate

How credit score and loan term impact your rate

Your credit score is perhaps the most important factor in determining your rate. The higher your score, the lower the rate you can expect. The table below shows average APRs from Experian by credit tier for new and used cars.

Loan term also influences the rate. Longer loan terms often carry higher APRs, in addition to increasing total interest paid. This means that the cheapest monthly payment may come at the cost of a higher rate and more interest over time.

Sources: Investopedia, Broadview Federal Credit Union

How to shop for the best car loan interest rate

To get the best rate, compare offers from multiple lenders. When comparing, look at the APR, interest rate, length of the loan, and the total amount financed, as the CFPB recommends. Consider the total interest you'll pay, not just the monthly payment.

Your credit score plays a central role in the rate you're offered. Before applying, check your credit report and correct any errors. A higher score can save you thousands in interest over the life of the loan. Also, consider whether a shorter term might be worth the higher monthly payment, as it reduces total interest.

• Compare APRs from at least three lenders.
• Ask for loan terms of 36, 48, or 60 months, and compare the total interest.
• Make a larger down payment to reduce principal and interest charges.
• If your credit score improves, consider refinancing to a lower rate.

Sources: Consumer Financial Protection Bureau, Certified AutoBrokers Inc.

Side-by-side category and decision-criteria matrix

When choosing between loan offers, use the following decision criteria, which are supported by the evidence. The table compares categories based on factors that matter most.

Sources: Consumer Financial Protection Bureau, Bankrate, Investopedia, Certified AutoBrokers Inc., Broadview Federal Credit Union