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- The average new car’s interest rate in 2021 is 4.09% and 8.66% for used, according to Experian.
- Credit score, whether the car is new or used, and loan term largely determine interest rates.
- The average rate dropped since the first quarter of 2020, down from 5.22% for new and 9.33%.
In the first quarter of 2021, the average auto loan rate for a new car was 4.09%, while the typical used car loan carried an interest rate of 8.66% according to Experian’s State of the Automotive Finance Market.
Interest rates are calculated with many factors in mind, including your credit score, the type of car you’re buying, and where you live. Auto loans can be found through a dealership, or by gathering pre-approvals from institutions you’d like to work with, such as banks, credit unions , or independent lenders.
Experian’s data shows the two biggest factors on your auto loan’s interest rate are your credit score and whether you’re buying a new or used car.
Buying used could mean higher interest rates
Buying a new car may be more expensive, all in all, than buying used. But, new and used auto loan interest rates are rather different, no matter your credit score. Based on Experian data, Insider calculated the difference between new and used interest rates. On average, used car financing costs about four percentage points more than new financing.
The gap between how much more a used car costs to finance narrows as credit scores increase, but even for the best credit scores, a used car will cost over 1% more to finance than a new car.
Used cars are more expensive to finance because they’re a higher risk. Used cars often have lower values, plus a bigger chance that they could be totaled in an accident and the financing company could lose money. That risk gets passed on in the form of higher interest rates, no matter the borrower’s credit score.
Loans under 60 months have lower interest rates
Loan terms can have some effect on your interest rate. In general, the longer you pay, the higher your interest rate is.
After 60 months, your loan is considered higher risk, and there are even bigger spikes in the amount you’ll pay to borrow. The average 72-month auto loan rate is almost 0.3% higher than the typical 36-month loan’s interest rate. That’s because there is a correlation between longer loan terms and nonpayment – lenders worry that borrowers with a long loan term ultimately won’t pay them back in full. Over the 60-month mark, interest rates jump with each year added to the loan.
Data from SP Global for new car purchases with a $25,000 loan shows how much the average interest rate changes:
It’s best to keep your auto loan at 60 months or fewer, not only to save on interest, but also to keep your loan from becoming worth more than your car, also called being underwater. As cars get older, they lose value. It’s not only a risk to you, but also to your lender, and that risk is reflected in your interest rate.
The lender you use makes a difference
When you start shopping for auto loans, you’ll find that the lender you choose does make a difference. Here are the starting interest rates from several different lenders for both new and used cars.
Banks set their minimum auto loan borrowing rates independently, so it’s important to shop around and compare offers to see what’s best for you. Get pre-approvals from several different lenders, and compare the APRs and monthly payments to find the offer best suited for you.