A high interest rate on a car loan is one that's above the national average. In the second quarter of 2024, the average rate was 6.84% for new cars and 12.01% for used cars, according to Experian's State of the Automotive Finance Market report.
Car Loan APRs by Credit Score
Excellent (750 - 850): 2.96 percent for new, 3.68 percent for used. Good (700 - 749): 4.03 percent for new, 5.53 percent for used. Fair (650 - 699): 6.75 percent for new, 10.33 percent for used.
The rule recommends making a 20% down payment on the car, taking four years to return the money to the lender, and keeping transportation costs at no more than 10% of your monthly income.
It's good practice to make a down payment of at least 20% on a new car (10% for used). A larger down payment can also help you nab a better interest rate. But how much a down payment should be for a car isn't black and white. If you can't afford 10% or 20%, the best down payment is the one you can afford.
Use the 35% income rule to find out what fits your budget. If you make $20,000, your max car price should be $7,000. If you make $30,000, your max car price should be $10,500. If you make $30,000, your max car price should be $10,500.
Negotiating your interest rate can help save you hundreds or thousands of dollars over the life of the loan. Negotiating can be as simple as asking the dealer if those are the best loan terms they can offer you or by pointing out lower rates available at a competing lender.
Even people with good credit scores make mistakes, and a bank may charge a penalty APR on your credit card without placing a negative mark on your credit report. Penalty APRs typically increase credit card interest rates significantly due to a late, returned or missed payment.
Individuals with an 800 credit score can secure an average interest rate of 5.25% for new cars and 7.13% for used cars. A high credit score allows borrowers to access favorable interest rates and loan terms, which can lower overall borrowing costs.
On average, a new car buyer with an excellent credit score can secure an average interest rate of 5.25%, but that average jumps to 15.77% for borrowers with poor credit scores. For used car buyers, those averages range from 7.13% to 21.55%, depending on the borrower's credit history.
This is in contrast to last year when borrowers were met with climbing interest rates driven by the four rate hikes in 2023. As of late 2024, the Fed has lowered rates three times, which will help to continue bringing rates down into 2025.
Pros. May help you get the best terms: Dealers generally work with a limited set of lenders, who may not offer the ideal loan terms. In addition, dealers may add a markup to the annual percentage rate (APR) as compensation for arranging the loan. When you work directly with a bank, you won't have to worry about this.
Sell the Car
One way to get out of a car loan is to sell the vehicle privately. If you're not upside down on the loan, meaning the car is more valuable than what you currently owe on it, you can use the proceeds of the sale to pay off the current loan in full.
Since the dealership only profits from the actual sale, they will rarely agree to bargain down the price and often waive other incentives, like cashback rebates. Stripping away rebates helps them make their money back. Because of this, a no-interest loan could cost more than the savings you'd get negotiating on price.
Payments would be around $377 per month. According to the results, it will take you 60 months, an interest rate of 5% of $2,645, to fully pay your $20,000 car loan. However, the monthly cost of a $20,000 car loan will depend on your repayment period and the annual percentage rate (APR).
Because of the high interest rates and risk of going upside down, most experts agree that a 72-month loan isn't an ideal choice. Experts recommend that borrowers take out a shorter loan. And for an optimal interest rate, a loan term fewer than 60 months is a better way to go.
Example: A six year fixed-rate loan for a $25,000 new car, with 20% down, requires a $20,000 loan. Based on a simple interest rate of 3.4% and a loan fee of $200, this loan would have 72 monthly payments of $310.54 each and an annual percentage rate (APR) of 3.74%.
To calculate an affordable car payment, use the recommended 20% down and 60-month maximum loan term. Based on those terms, a person making $100,000 a year can afford a $61,000 car, assuming their other expenses allow for a monthly payment of approximately $931.05.
The final rule, which is effective on July 30, 2024, prohibits certain misrepresentations in the financing process, sets disclosure requirements on dealers' advertising and sales communications, mandates that dealers obtain consumers' express, informed consent for charges, and prohibits the sale of add-on products or ...