What is APR on a Car Loan?

When you look up the “average APR for a car loan,” you’ll likely come across a range of figures. But those numbers won’t mean much unless you understand how car loans work and how your financial profile plays a role in determining your rate.

 

APR, or annual percentage rate, represents the overall cost of borrowing. It includes not only the interest rate but also any lender fees, giving you a clearer picture of what you’ll pay over the life of your loan. Your credit score is a main factor in deciding your car loan APR, the better your credit, the lower the rate you’ll be offered.

 

You won’t know your exact APR until you begin applying for car loans, but it’s still a smart move to research and estimate what rate you might qualify for. This can help you prepare financially and make more informed decisions before heading to the dealership.

What is an APR?

The Annual Percentage Rate, or APR, reflects the yearly cost of financing a vehicle, including both the interest rate and any fees tied to the loan. It gives you a more complete picture of what you’ll pay each year for borrowing.

 

Think of APR as a helpful comparison tool. It was introduced through the Truth in Lending Act of 1968 to make loan terms more transparent. Before that, it was difficult for consumers to compare offers because hidden fees weren’t always clearly stated. Now, lenders are required to include all relevant costs, like application fees or service charges, within the APR, helping you understand the full cost of the loan and make more informed choices.

What is a good APR for a car?

A good APR for a car loan generally depends on your credit score, loan term, and the type of vehicle you’re financing. As a rule of thumb, an APR below 5% is considered excellent for new cars if you have strong credit. For used cars, a good APR typically falls under 7%, though rates can be higher depending on your credit profile.

 

If your credit score is average or fair, expect APRs between 6% and 12%. Borrowers with poor credit may see rates above 15%, which can significantly increase the total cost of the loan.

 

To find the best APR, it’s important to compare multiple lenders and consider factors like loan term and down payment. A lower APR not only saves money on interest but also reduces your monthly payments, making it easier to afford your vehicle over time.

 

Overall, a good APR is one that fits your credit profile and financial goals, while keeping your overall borrowing costs as low as possible.

The Difference Between APR and Interest Rate

Your loan’s interest rate is the percentage your lender charges for borrowing money, based solely on the principal amount. However, it doesn’t include any extra costs tied to the loan, things like origination fees or administrative charges.

 

That’s where APR, or Annual Percentage Rate, comes in. Required by the Truth in Lending Act, APR gives you a more complete picture by combining the interest rate with certain loan-related fees. This makes it easier to compare loan offers from different lenders and understand the total cost of financing.

 

As a loan might have a low interest rate, hidden fees can drive up the overall cost. That’s why the APR is usually higher than the interest rate. If a loan has no added costs, the two rates may be the same.

 

When comparing loans with identical interest rates, the one with the lower APR generally includes fewer fees. Always review the fee breakdown so you know exactly what you’re paying for when financing a vehicle.

Why Is It Important to Understand APR?

Since it shows the true cost of borrowing and facilitates more efficient loan offer comparison, understanding APR is essential.

Auto loans often come with more than just interest charges. They can include various fees such as:

 

• Loan application or processing fees (sometimes called establishment fees)
• Prepaid interest, which covers the interest due from the loan disbursement date to your first payment
• Administrative and document handling charges

It can be tricky to calculate all of these costs on your own. That’s where the APR comes in; it combines your interest rate with these extra charges, giving you a clearer picture of the loan’s total cost. When comparing auto loan options, looking at the APR makes it easier to spot the best overall deal.

Factors The APR Doesn’t Account For

As APR offers a more complete view of your loan costs, it doesn’t cover everything. One key limitation is that APR doesn’t factor in the compounding effect of interest. In many car loans, interest is front-loaded, meaning you pay more interest early on and less as the balance decreases. This makes the total interest paid slightly different from what simple APR calculations suggest.

 

APR also doesn’t include other car-related expenses that fall outside the loan itself. Costs like vehicle registration, insurance premiums, and maintenance aren’t reflected in the APR, especially if they’re not bundled into the financing. When budgeting for your car purchase, be sure to consider these additional expenses alongside the APR for a more accurate financial picture.

What Affects an APR for Car Loans?

Several factors influence the APR you receive on a car loan, and one of the most significant is your credit score. Your credit score gives lenders a sense of how reliable you are when it comes to repaying debt. The higher your score, the more likely you are to qualify for a lower APR.

 

Lenders generally view borrowers with low credit scores as higher-risk, which often leads to higher APRs. On the other hand, those with strong credit typically secure better rates. That’s why finding a loan with the lowest possible APR can save you money over time.

Here’s a general breakdown of credit score ranges:

• Bad: 300–629
• Fair: 630–689
• Good: 690–719
• Excellent: 720–850

Some lenders may not approve applicants with poor credit, meaning you might need to look for subprime lenders or those with more flexible requirements.

 

Another important factor is the vehicle itself. New cars often qualify for lower APRs compared to used cars, which are considered higher risk. Taking the time to compare loan offers and check different lenders can help you find the most favorable terms for your budget and financial needs.

Car Loan APRs by Credit Score

Car loan interest rates can vary widely, and while the national averages can give you a starting point, your actual rate depends on factors like your credit score, lender, and whether you’re buying a new or used vehicle.

 

In 2022, the average APR was about 4.07% for new cars and 8.62% for used ones. But your credit tier plays a major role in determining the rate you’ll be offered. Here’s a general look at average car loan APRs based on credit score ranges:

 

• Excellent (750–850): Around 2.96% for new cars, 3.68% for used
• Good (700–749): About 4.03% for new, 5.53% for used
• Fair (650–699): Roughly 6.75% for new, 10.33% for used
• Poor (450–649): Typically 12.84% for new, 20.43% for used

As shown, buyers with stronger credit usually secure lower rates, while those with lower scores may face significantly higher APRs, especially when purchasing a used car. Knowing where you stand can help you plan better and potentially negotiate better loan terms.

Why Do Average Interest Rates Vary for New and Used Vehicles?

Interest rates on car loans are usually higher for used vehicles than for new ones. This difference exists because used cars come with more risk, older vehicles are generally less reliable, and if the car breaks down, it increases the chance the borrower might stop making payments. To offset that risk, lenders often apply a higher APR.

 

New cars, on the other hand, tend to qualify for lower interest rates. Since these vehicles have higher values and longer lifespans, lenders view them as safer investments. Plus, when you’re financing a brand-new car, you’re likely borrowing a larger amount, which makes the loan more profitable for the lender. That potential for higher returns is often passed on to you through a lower APR.

Average Rates for Auto Loans by Lender

Even with great credit, it’s smart to compare offers from different lenders before choosing an auto loan. APRs can vary significantly depending on the lender, so shopping around can help you secure the best possible deal for your financial situation.

Here’s a look at basic auto loan APR ranges from a few major lenders, based on data from ValuePenguin:

 

• Alliant Credit Union: 3.24% – 18.19%
• Capital One: 3.99% – 13.98%
• PenFed Credit Union: 1.99% – 18.00%
• PNC Bank: 2.79% – 14.99%

These ranges show that even borrowers with similar credit profiles might receive different rates depending on the lender. Comparing quotes can help you find the most competitive terms and save money over the life of your loan.

How Does a Low APR Save Me Money?

Your car loan’s APR directly affects how much you’ll pay in interest over the life of the loan. That’s why locking in a low APR can lead to significant savings. Comparing multiple loan offers before signing any agreement can help you find the most affordable option.

 

Opting for a shorter loan term can also help reduce your APR. Lenders typically offer lower rates on short-term loans since the repayment period is shorter, reducing their risk. While longer-term loans might offer smaller monthly payments, they often come with higher overall interest costs.

 

For example, consider a $28,800 loan over five years. At a 4.96% APR, you’d pay about $3,778 in interest. The same loan at an 11.93% APR would cost you around $9,577. For borrowers with poor credit, a 23.81% APR could lead to interest charges totaling $20,721.

 

That means simply securing a lower APR could save you more than $15,000 over the life of your car loan, making it one of the most impactful choices in your financing journey.

Best Auto Loan Rates

To secure the best auto loan rates, it’s important to shop around and compare offers from various types of lenders. Different lenders, such as banks, credit unions, online lenders, and dealerships, offer a range of rates and loan terms, so exploring your options can help you find the most affordable financing.

 

Credit unions often stand out for offering some of the lowest APRs available. Because they operate as nonprofit organizations focused on serving their members, they tend to provide more competitive rates and flexible terms than traditional banks. If you qualify to join a credit union, it’s definitely worth checking their loan options first.

 

Online lenders have become increasingly popular because they combine competitive rates with convenience. Their streamlined application processes often mean faster approvals, which can be a huge advantage if you want to get behind the wheel quickly. Many online lenders also offer prequalification tools that allow you to see potential rates without impacting your credit score.

 

Car dealerships sometimes provide special financing deals, especially on new vehicles. These promotions can include low or even 0% APR offers for qualified buyers, making dealership financing an attractive option if you meet the criteria. However, it’s wise to compare these offers with outside lenders to ensure you’re truly getting the best deal.

Tips for Securing the Best Auto Loan Rates

Getting the best possible auto loan rate can save you a significant amount of money over the life of your loan. By taking a few proactive steps, you can improve your chances of qualifying for lower APRs and better loan terms. Here are some helpful strategies to keep in mind:

 

• Boost Your Credit Score: One of the most effective ways to qualify for a lower APR is to improve your credit health. Focus on paying down existing debts, making all payments on time, and avoiding new credit inquiries before applying for a loan. A higher credit score signals to lenders that you are a reliable borrower, which can lead to better rates. 
• Shop Around and Compare Offers: Don’t accept the first loan offer you receive. Different lenders such as banks, credit unions, and online institutions, offer a variety of rates and terms. Comparing multiple quotes allows you to find the most competitive rate and loan conditions that suit your budget. 
• Consider Getting Pre-Approved: Pre-approval gives you a clearer picture of the loan amounts and APRs you might qualify for before you start shopping for a car. This can help you negotiate better and avoid surprises during the buying process. 
• Negotiate Loan Terms: Remember that loan terms are not always set in stone. Whether you’re working with a bank, credit union, or dealership, don’t hesitate to discuss and negotiate the APR, loan length, or fees. Sometimes a lender may be willing to offer you a better deal if you ask. 
• Use Online Tools Like Capital One Auto Navigator: Online platforms such as Capital One Auto Navigator can simplify your search by letting you compare rates and terms from multiple lenders in one place. These tools help you identify the best financing options quickly and with minimal impact on your credit score.

Vehicle Financing Options

You have a variety of choices that cater to different needs and preferences when it comes to financing a vehicle. Understanding these options can help you find the best fit for your budget and credit situation:

 

• Traditional Loans: These loans are typically offered by banks and credit unions. They often provide competitive interest rates, especially if you have a strong credit history. Credit unions, in particular, are known for their member-focused approach and may offer more flexible loan terms compared to banks. Applying for a traditional loan usually involves a thorough credit check and documentation of your financial status. 
• Dealer Financing: Many car dealerships offer financing directly to buyers, often partnering with multiple lenders. Dealer financing can be convenient since you can arrange your loan and buy the car in one place. Dealerships sometimes feature promotional rates or incentives, such as 0% APR deals on new cars for qualified buyers. However, it’s important to compare these offers against other lenders to ensure you’re getting the best overall deal. 
• Online Lenders: Online financing options have gained popularity due to their speed and ease of use. These lenders often provide quick pre-approval decisions and allow you to compare multiple loan offers from the comfort of your home. Many online lenders offer competitive rates and flexible terms, making them a convenient option if you want a straightforward loan application process without visiting a bank or dealership.

Conclusion

Making responsible financial choices when purchasing a car requires knowing the annual percentage rate (APR) on a loan. APR gives you a clear picture of how much you’ll spend over the course of the loan by reflecting the full cost of borrowing, which includes both interest and fees. 

 

Finding the most economical financing option may be facilitated by understanding how APR operates, what influences it, and how to compare rates. You may receive a reasonable APR that matches your budget and saves you money by comparing rates and enhancing your credit. Knowing APR enables you to make informed decisions and steer clear of expensive surprises when purchasing a new or used vehicle.

FAQs about APR on a Car Loan

Q.1 What is a good APR on a car?

Ans: A good APR for a car loan typically ranges between 3% and 6%, depending on your credit score and loan term. Lower APRs mean you pay less interest over time. Borrowers with excellent credit usually qualify for rates under 5%, while higher rates often reflect increased risk or longer loan terms.

Q.2 Is 12% APR on a car high?

Ans: Yes, a 12% APR on a car loan is considered high, especially if you have a decent credit score. It means you’ll pay more in interest over the loan’s life. High APRs are common with poor credit or longer loan terms, so it’s worth shopping around or improving your credit to get a better rate.

Q.3 What is a good APR for a 72-month car loan?

Ans: For a 72-month car loan, a good APR is generally between 4% and 8%. Longer loan terms often come with slightly higher APRs due to increased risk for lenders. While longer terms lower monthly payments, they increase total interest paid, so it’s wise to aim for the lowest APR possible.

Q.4 Is 24% APR high for a car?

Ans: A 24% APR is very high for a car loan and usually indicates poor credit or subprime lending. This rate means significantly higher interest costs, increasing the overall loan expense. If offered a 24% APR, consider improving your credit or seeking alternative lenders for better financing options.

Q.5 How can I lower my APR on my car loan?

Ans: To lower your APR, improve your credit score by paying bills on time and reducing debt. Shop around and compare multiple lenders for the best rates. Consider a shorter loan term, make a larger down payment, or refinance your loan later when your credit improves.

Q.6 What percent APR is too high?

Ans: An APR above 15% is generally considered too high for a car loan. Such rates lead to excessive interest payments and financial strain. Borrowers should seek alternatives if offered rates this steep, either by improving credit or exploring other lenders to find more affordable financing.

Q.7 Can you negotiate APR on a car?

Ans: Yes, APR on a car loan is often negotiable. You can discuss rates with lenders or dealerships, especially if you have a strong credit score or pre-approval from other lenders. Negotiating can reduce your interest rate, saving you money over the loan term.

Q.8 How can I get 0 APR on my car?

Ans: To get 0% APR, look for special manufacturer or dealership promotions usually offered on new cars. These deals typically require excellent credit and a strong credit history. Carefully review terms to ensure you meet eligibility and avoid hidden fees that might offset the interest savings.