What determines your car loan rate
Your car loan rate is not set by the lender — it is calculated based on how risky the lender thinks you are. The main factors are your credit score, the size of your down payment, how long you want to borrow for, and the current market rate for auto loans. A higher credit score almost always means a lower rate. A larger down payment means you are borrowing less money, which also lowers your rate. The length of the loan matters too: a 36-month loan usually has a lower rate than a 72-month loan, because the lender has less time for something to go wrong.
The lender also looks at the car itself. A new car typically gets a lower rate than a used one, because it is worth more and will hold its value better. The age and mileage of a used car affect the rate as well. Finally, the current market rate for auto loans changes based on broader economic conditions — when the Federal Reserve raises interest rates, auto loan rates rise too, and when it lowers them, auto loan rates tend to fall.
Key Takeaways
- Your credit score is the single biggest factor in your rate; even a 50-point improvement can lower your rate by half a percent or more.
- Putting down 20 percent or more of the car's price reduces the amount you borrow and usually lowers your rate.
- Getting rate quotes from banks, credit unions, and online lenders before you go to the dealership shows you what you should actually pay.
- A shorter loan term (36 or 48 months) carries a lower rate than a longer one, though your monthly payment will be higher.
- Dealership rates are often higher than what you can get on your own, because the dealer marks up the rate they receive from their lender.
How your credit score affects your rate
Lenders use your credit score to predict whether you will pay back the loan on time. The higher your score, the lower the risk, and the lower your rate. The difference is real: someone with a score of 750 might get a rate of 4 percent, while someone with a score of 620 might get 9 percent or higher on the same car from the same lender.
If your score is below 650, you will likely face higher rates at most lenders. If it is between 650 and 700, you are in a middle range where improving your score by even 20 or 30 points can move you to a better rate tier. If your score is above 700, you are in the range where most lenders offer their best rates. You can check your own credit score for free through AnnualCreditReport.com, which is the official site for the three credit bureaus (Equifax, Experian, and TransUnion).
Getting rate quotes before you visit the dealership
The dealership is not the only place to borrow money for a car. Banks, credit unions, and online lenders all offer auto loans, and they often have lower rates than what the dealership will quote you. The dealership's rate is usually higher because the dealer marks up the rate they get from their lender — they make money on the difference between what they pay for the loan and what they charge you.
Before you go to the dealership, get rate quotes from at least two or three other sources. Call your own bank or credit union first — credit unions often have lower rates than banks. Then check online lenders like LendingClub, Upstart, or Lightstream. When you get a quote, ask whether it is a soft inquiry (which does not hurt your credit score) or a hard inquiry (which does). Most lenders will give you a soft quote first, then do a hard inquiry only if you decide to move forward. Multiple hard inquiries within 14 days usually count as a single inquiry for credit scoring purposes, so getting several quotes in a short window does not damage your score much.
Write down the rate, the loan term, and any fees each lender quotes you. Then you can compare them side by side and know what a fair rate looks like before the dealership makes their offer.
The trade-off between down payment and monthly payment
A larger down payment lowers your rate because you are borrowing less money. It also lowers your monthly payment. But it means spending more cash upfront. The question is whether it makes sense for your situation.
If you have the cash and you are not draining your emergency fund, putting down 20 percent of the car's price is a common target. It is large enough to lower your rate noticeably and to keep you from owing more than the car is worth (which is called being underwater on the loan). If you cannot put down 20 percent without emptying your savings, a smaller down payment is fine — just know that your rate will be higher and your monthly payment will be larger.
Loan term and how it affects your rate and payment
A shorter loan term means a lower interest rate but a higher monthly payment. A longer loan term means a higher interest rate but a lower monthly payment. The choice depends on your budget and how long you plan to keep the car.
A 36-month or 48-month loan is common for new cars and usually carries the lender's best rates. A 60-month or 72-month loan spreads the payments out, which lowers your monthly bill, but the rate is higher and you pay more interest overall. A 72-month loan also means you will be paying for the car long after it starts needing repairs, which can strain your budget. If you can afford the payment on a 48-month loan, it usually costs you less in the long run than a 60 or 72-month loan, even though the monthly payment is higher.
New cars versus used cars and how rates differ
New cars almost always get lower rates than used cars, sometimes by a full percentage point or more. This is because a new car has a warranty, holds its value better, and is less likely to have hidden mechanical problems. A used car is riskier for the lender, so they charge more to cover that risk.
The age of a used car matters a lot. A car that is two or three years old usually gets a better rate than one that is ten years old. Mileage also affects the rate — a car with 40,000 miles will get a better rate than one with 120,000 miles. If you are shopping for a used car and rates are important to you, focusing on newer, lower-mileage vehicles will give you access to better rates, even though those cars cost more upfront.
When market rates change and what you can do about it
Auto loan rates move up and down based on what the Federal Reserve does with interest rates and what is happening in the broader economy. When the Fed raises rates, auto loan rates usually rise within a few weeks. When the Fed lowers rates, auto loan rates tend to follow, though sometimes with a delay.
If you are shopping for a car and rates have just gone up, you have a few options. You can wait to see if rates come back down, though there is no may provide they will. You can improve your credit score in the meantime, which will lower your rate regardless of market conditions. Or you can move forward now and refinance later if rates drop significantly — refinancing means taking out a new loan to pay off the old one, and you can do it with a different lender if you find a better rate. Just know that refinancing involves a new hard inquiry and new fees, so it only makes sense if the rate drop is large enough to cover those costs.
Frequently Asked Questions
Can I get a low rate if my credit score is below 650?
Yes, but your rate will be higher than someone with a better score. Credit unions sometimes offer rates to people with lower scores, especially if you are a member. Online lenders like Upstart also work with lower credit scores. The rate will likely be 8 to 12 percent or higher, but it is worth getting quotes to see what is actually available to you.
What is the difference between a soft inquiry and a hard inquiry?
A soft inquiry is a quick check that does not affect your credit score. A hard inquiry is a full credit check that lenders do when you are seriously explore, and it lowers your score by a few points. Multiple hard inquiries within 14 days usually count as one for scoring purposes, so getting several auto loan quotes in a short window does not hurt much.
Should I always choose the shortest loan term to pay less interest?
Not necessarily. A shorter term means a higher monthly payment, and if that payment stretches your budget too thin, you might miss payments or go into debt elsewhere. Choose a term where the monthly payment fits your budget and still leaves room for emergencies. A 48 or 60-month loan is often a good middle ground.
Can I refinance my car loan if I find a better rate later?
Yes. Refinancing means paying off your current loan with a new loan from a different lender, usually at a lower rate. It makes sense if the new rate is at least one percent lower and you plan to keep the car long enough to recover the refinancing fees, which usually take six months to a year.
Why is the dealership rate higher than what I found on my own?
The dealership gets a rate from their lender, then marks it up to make a profit. They might quote you 6 percent when their lender approved them at 5 percent. This is why getting your own quotes first gives you leverage to negotiate or to decline the dealership's offer and use your own financing instead.