What Is Too High an Interest Rate for a Car?

Because everyone’s situation when car shopping will be different, there’s no one exact answer to what is too high an interest rate for a car loan. The interest rate you are likely to be offered is based on several main factors that will be specific to you. Knowing what the typical range is will help you understand if your rate makes sense for you.

Shopping for a car can be great fun or a great pain, depending on your perspective. But thinking about what interest rate you will pay on your auto loans is probably low on everyone’s list of a good time. However, knowing what auto loan rates to expect before you start shopping for your next car is important in helping you make the best financial decisions.

What Is APR for Cars?

Unless you’re paying cash for your new automobile, a car loan will likely be necessary. But a loan comes with a cost, as lenders charge interest on money borrowed. A loan’s APR (or annual percentage rate) reflects the interest charged by a lender, but it also takes into account certain fees associated with the loan. These fees are called “prepaid finance charges” and may vary widely between lenders, so watch for them.

One good example of a prepaid finance charge is an “origination fee” which some lenders may charge to cover costs associated with underwriting their loans, and/or to simply increase their fee income. This fee could be a lot or a little or may not be charged at all. Such fees are factored into the APR so you can compare the true, total cost of borrowing between different lenders. At Indiana Members Credit Union, we do not charge origination fees or prepaid finance charges, but many of our competitors do.

APR and interest rates on cars depend on four main factors, so let’s look at each individually to get an idea of how they each will affect the final APR you are likely to get.

  • Borrower’s Credit Score
  • Length of Loan
  • Car Being Purchased
  • Interest Rate Set by the Federal Reserve

Average Car Loan Interest Rate by Credit Score

In general, if you are applying for a car loan, your credit score is going to affect the type of interest rate available to you. Usually, the higher your credit score, the lower your interest rate will be. This is because lenders will consider you a lower risk to lend money to, since you have shown in the past you pay back debts on-time. 

There are many car loan calculator options available online that will show you what average APR is for your credit score, and these can be a good place to start. One such site shows that for those with a high credit score (720 and above) the average APR is 3.65% for new cars and for those with low credit scores (579 or below) the average APR is 14.39% for new cars.

One way that a good lender can help with your car loan interest rate is by helping you improve your credit score. At Indiana Members Credit Union, we have financial advisors who are always available to walk you through your options of improving your credit score, and other important financial matters.

What Is a Good Interest Rate on a Car by Length of Loan?

The length of the loan you take out to pay for your car is going to have an affect on the interest rate in most cases. Typically, the shorter the length of time to repay the loan, the lower the interest rate and vice versa. This is because since the lender is using the car itself as collateral for the loan, the value of the car decreases over time. So if a borrower takes out an 84 month loan, it will be seven years before the car loan is paid off. For the last few years of that loan period, the car may have depreciated to the point that the lender is at higher risk for loan defaults.

To give you an idea of what to expect, a 36 month  loan average APR is 4.21%, while a 72 month loan average APR is 4.45%. IMCU offers very competitive lending rates, almost always lower than average.

What Is a Good Interest Rate on a Used Car Versus a New Car?

Usually, new cars are eligible for lower interest rates than used cars. New cars retain their value and are considered safer collateral than older, used cars, so a lender is not taking as big a risk on a new car loan. Some car dealerships even offer a 0% interest rate as an incentive to buy new from them.

In 2022, the average APR for a used car was 8.62%, while for a new car it was 4.07%.

The Federal Reserve’s Effect on the Average Car Loan Interest Rate Calculator

The  interest rate set by the Federal Reserve is the last of the main things that affect APR when looking at car loans. Whenever there is a change in this interest rate, it has ripple effects on all types of borrowing and lending, and car loans are no exception. When the interest rate increases, this higher rate to lenders is passed on to consumers, but when the interest rate decreases, consumers are able to benefit by getting lower APR on many loans as well.

Indiana Members Credit Union: Your Car Loan Awaits

If you’re considering buying a car, getting pre-approved for a car loan can take away a lot of the stress and uncertainty that can come with car financing. We at IMCU want to set you up for your best car shopping experience, so check out our website to learn all you need to know before you start car shopping!