Your interest rate depends on your credit score, the loan term, the vehicle age, and the lender you choose

The interest rate you receive on a car loan is not set by any single rule or formula. Instead, lenders calculate it based on how risky they think lending to you is. Your credit score is the largest factor — borrowers with scores above 750 typically see rates 2 to 4 percentage points lower than those with scores below 650. The loan term (how many months you borrow for) also matters: a 36-month loan usually carries a lower rate than a 72-month one, because the lender's money is at risk for less time. Whether you buy a new car or a used one affects the rate too, as do the size of your down payment and the specific lender you work with.

The rate you see advertised is rarely the rate you will receive. Banks, credit unions, and captive finance companies (like Ford Credit or Toyota Financial Services) all price loans differently. A credit union member might see a rate 1 to 2 percentage points lower than a bank customer with the same credit score. Shopping across at least three lenders before you sign anything is standard practice and can save you hundreds of dollars over the life of the loan.

Key Takeaways

  • Credit score is the single largest factor in your rate; scores above 750 typically receive rates 2 to 4 points lower than scores below 650.
  • Loan term, vehicle age, down payment size, and lender type all shift your rate, sometimes by 1 to 2 percentage points each.
  • The advertised rate is a starting point, not a may provide; your actual rate depends on your full financial profile and the lender's underwriting.
  • Comparing offers from at least three lenders — a bank, a credit union, and a captive finance company — usually reveals meaningful rate differences.
  • Preapproval from a lender shows you the rate you would receive before you walk into a dealership, which protects you from dealer markup.

How credit score shapes your rate

Lenders use your credit score as a shorthand for how likely you are to repay on time. The score reflects your payment history, how much debt you already carry, how long your credit accounts have been open, and how many recent credit inquiries you have. Most auto lenders use the FICO score, which ranges from 300 to 850. Scores are grouped into tiers, and each tier has a different rate band.

A borrower with a score of 780 and a borrower with a score of 750 may see the same rate, because they fall in the same tier. But a borrower with a 720 score often sees a noticeably higher rate — sometimes 0.5 to 1 percentage point higher — because they have crossed into a riskier category. Below 650, the jumps become steeper. A score of 620 might carry a rate 3 to 4 percentage points higher than a score of 750, depending on the lender.

If your score is below 700, checking it before you shop for a loan is worth your time. You can request a free credit report from each of the three major bureaus (Equifax, Experian, and TransUnion) once per year at annualcreditreport.com. If you spot errors — a late payment that was not yours, a closed account still showing as open — you can dispute them. Fixing errors can raise your score by 10 to 50 points, which may lower your rate by 0.25 to 1 percentage point.

Loan term and vehicle age as rate factors

A shorter loan term means a lower interest rate. A 36-month car loan typically carries a rate 0.5 to 1 percentage point lower than a 60-month loan for the same borrower and vehicle. The reason is straightforward: the lender's money is at risk for less time, so they charge less for that risk. A 72-month or 84-month loan, common for used cars or lower-income borrowers, usually carries the highest rate of all.

The vehicle's age also shifts your rate. New cars usually receive the lowest rates because they hold their value and are less likely to need expensive repairs during the loan period. Used cars — typically defined as anything older than one model year — carry higher rates. A car that is 5 to 10 years old might see a rate 0.5 to 1.5 percentage points higher than a new car for the same borrower. Very old vehicles (15+ years) or those with high mileage may be declined by some lenders or offered only at significantly higher rates.

The size of your down payment also influences the rate. A larger down payment means you are borrowing less, so the lender's risk is lower. Putting down 20 percent instead of 10 percent might lower your rate by 0.25 to 0.5 percentage points. Some lenders offer rate discounts for down payments above certain thresholds — for example, 0.25 points off if you put down 25 percent or more.

How different lenders price the same loan

Banks, credit unions, and captive finance companies use the same factors (credit score, term, vehicle age) but weight them differently and add different markups. A bank might price a 60-month used-car loan at 7.5 percent for a borrower with a 700 credit score. A credit union serving the same borrower might offer 6.2 percent. A captive finance company (like Ally or Capital One Auto Finance) might offer 6.8 percent. All three are pricing the same risk, but their cost of funds and business model differ.

Credit unions typically offer lower rates because they are member-owned and operate on a not-for-profit basis. They pass savings back to members in the form of lower rates and fees. However, you must be a member to borrow, and membership rules vary. Some credit unions are open to anyone in a geographic area; others require you to work for a specific employer or belong to a specific organization.

Banks offer competitive rates but often charge origination fees (typically 0.5 to 1 percent of the loan amount) that credit unions do not. Captive finance companies, owned by the automaker or a large financial services firm, sometimes offer promotional rates (like 0 percent for 36 months) to move inventory, but these rates are usually available only to borrowers with excellent credit and are often not the best deal when you factor in the full cost.

Preapproval versus dealer financing

Getting preapproved for a loan before you visit a dealership shows you the actual rate a lender will offer you. Preapproval involves a hard credit inquiry and a review of your income and debt, so the rate is binding (or very close to it) if you proceed. Most preapprovals are good for 30 to 60 days.

Dealership financing is different. The dealer arranges the loan through a lender, but the dealer often marks up the rate by 0.5 to 2 percentage points and keeps the difference. A lender might approve you at 6.5 percent, but the dealer presents you with a 7.5 percent rate and pockets the 1 percent spread. Dealers are required to disclose the rate and the annual percentage rate (APR) in writing before you sign, but many buyers do not realize they can negotiate the rate or walk away.

Having a preapproval in hand gives you leverage. You can tell the dealer, "I have an offer at 6.2 percent from my credit union. Can you beat that?" Many dealers will, because they earn a commission on the sale even if they do not finance it. If they cannot beat your preapproved rate, you straightforward use the preapproval and buy the car anyway.

What happens after you receive an offer

Once a lender gives you a rate, they will provide a Loan Estimate or a rate quote that shows the interest rate, the APR, the monthly payment, and the total amount you will pay over the life of the loan. The APR is slightly higher than the interest rate because it includes fees and other costs. For a car loan, the difference is usually small — 0.1 to 0.3 percentage points — but it is the number you should use when comparing offers across lenders.

The rate is locked in at the time you sign the loan documents, not when you receive the quote. If interest rates in the market rise between the time you get the quote and the time you close the loan, your rate does not change. If rates fall, your rate does not fall either — you are locked in. This is why timing matters: if you know rates are rising, locking in sooner is better. If rates are falling, waiting a few days might get you a better offer.

After you sign, the lender funds the loan and sends the money to the dealer or seller. You receive the loan documents, which include the promissory note (your promise to repay), the security agreement (which gives the lender a claim on the car if you do not pay), and a Truth in Lending disclosure that restates the rate, APR, and payment schedule. Keep these documents; you will need them if you want to refinance later.

Refinancing if your rate is higher than current market rates

If you took out a car loan at 8 percent and market rates have fallen to 6 percent, you can refinance — take out a new loan to pay off the old one. Refinancing makes sense if the new rate is at least 1 to 2 percentage points lower and you have at least two years left on the original loan. The new lender pays off the old loan, and you start making payments to the new lender at the new rate.

Refinancing involves a hard credit inquiry, so it will temporarily lower your credit score by a few points. Some lenders charge an origination fee for refinancing, though many do not. If you refinance, you can keep the same loan term (so your payment stays the same but more goes to principal) or extend the term (so your payment drops). Extending the term means you pay interest for longer, so the savings are smaller.

You can refinance through a bank, credit union, or online lender. The process is faster than the original loan because the lender already knows the vehicle (it has a title and registration) and you have a payment history on the original loan. Most refinances close in 5 to 10 business days.

Frequently Asked Questions

Does shopping for rates hurt my credit score?

Multiple hard inquiries from different lenders within 14 to 45 days (depending on the scoring model) count as a single inquiry, so shopping around does not significantly damage your score. Each inquiry lowers your score by a few points, but the effect fades within a few months. Waiting six months between applications, however, means each inquiry counts separately and the damage is greater.

Can I negotiate the interest rate at a dealership?

Yes. The rate the dealer quotes is not final. You can ask them to lower it, and many will if you have a competing offer from another lender. Dealers earn a commission on the sale regardless of financing, so they have room to negotiate. Bringing a preapproval letter gives you concrete leverage.

What is the difference between APR and interest rate?

The interest rate is the percentage of the loan amount you pay annually in interest. The APR includes the interest rate plus fees and other costs, expressed as an annual percentage. For car loans, the difference is usually 0.1 to 0.3 percentage points. Use the APR when comparing offers across lenders.

Is a 0 percent interest rate offer actually a good deal?

Not always. A 0 percent rate is usually available only to borrowers with excellent credit (typically 750+) and requires a shorter loan term (36 to 48 months). The monthly payment is higher because you are not getting a discount on interest. A slightly higher rate with a longer term might result in a lower monthly payment and lower total cost if you can invest the difference elsewhere.

Can I lock in a rate before I find a car?

Most lenders will preapprove you for a rate without knowing which car you will buy. The preapproval is based on your credit, income, and debt. Once you choose a specific car, the lender may adjust the rate slightly based on the vehicle's age and value, but the preapproved rate gives you a reliable starting point.