How Are Auto Loan Interest Rates Calculated

How Are Auto Loan Interest Rates Calculated

The interest you pay when you finance a vehicle is the cost of borrowing money from a lender.

Monthly loan payments include interest charges, which can add thousands of dollars to the amount you must repay. Having an understanding of how car loan interest is calculated, what factors can impact your rate, and how to minimize interest charges is extremely important.

How Does Auto Loan Interest Work

There are two ways lenders calculate interest on auto loans – simple and precomputed. The interest rate is determined by the loan balance on the due date of your car payment. Each month, you pay a different amount of interest. A car loan with precomputed interest will calculate your claim based on the loan amount at the beginning of your loan, and your appeal will remain the same each month.

Factors That Impact Interest Rates

After reviewing your credit and financial records, your lender determines the interest rate you receive. You’ll be offered a rate based on a range of factors.

Credit Scores

Generally, people with good credit scores qualify for lower rates than those with poor credit scores. Experian‘s State of the Automotive Finance Market of 2020 found that the average rate on new-car loans was almost 11 percentage points lower for people with good credit scores than for people with poor credit scores.

Type of Lender

Auto loans are available through many banks, credit unions, and online lenders. Credit unions generally offer lower interest rates on car loans than banks do.

There are also financing companies associated with automakers, and they may run special promotions. Dealers may offer you 0% APR if you have excellent credit.

Loan Term Length

A loan with a longer term may be charged a higher interest rate. Because cars depreciate quickly, you could end up owing more than the car is worth if you choose a long-term loan. Increasing the loan term may lower your monthly payment, but you will end up paying more in interest over time than if you choose a shorter term.

Down Payment Amount

There may be higher rates if you don’t put down any money. A higher interest rate compensates the lender for the risk that you may default on the loan, leaving the lender with a vehicle that is worth less than what is owed.

Buying New vs. Used

The interest rates on new-car loans tend to be lower than those on used-car loans. Experian’s State of the Automotive Finance Market report shows that used car loans had an average interest rate of 9.65% in the first quarter of 2020, and new-car loans had an average interest rate of 5.61%.

The Economy

The interest rate isn’t static, changing according to market conditions. People tend to borrow money at a lower rate during rough times, such as the financial crisis from 2007 to 2009, to encourage them to expand their businesses. Rates are typically higher when the economy is vital to help slow inflation.

Auto Loan Interest Rates on Type of Car

The average price of a new car is over $36,000, and the average cost of a used car is over $20,000. However, the car’s price does not tell the whole story of what it will cost to buy it for most buyers. Since most people borrow money to buy a car, the interest rate on their auto loan increases the final cost of the vehicle. Interest rates on auto loans are usually the second most expensive part of buying a car. Saving thousands of dollars on an auto loan with a reasonable interest rate is possible.

A secured loan uses the car you’re buying as collateral. If you expect to pay a fixed interest rate and monthly payments for 24 to 84 months. You can find auto loans through national banks, local credit unions, and online lenders in addition to dealership financing.

Secured loans like auto loans usually come with lower interest rates than unsecured loans like personal loans.

New Car Auto Loan Rates

You can always use the car you’re buying as collateral for an auto loan since it is a secured loan. In most cases, you’ll pay a fixed interest rate and monthly payment for 24 to 84 months. Dealerships may offer their financing, but national banks, credit unions, and online lenders may also offer auto loans.

  • 36-month term: 3.84 percent.
  • 48-month period: 3.87 percent.
  • 60-month term: 3.86 percent.
  • 72-month term: 3.64 percent.

Used Car Auto Loan Rates

Used Card auto loan rates

  • 36-month term: 4.28 percent.
  • 48-month period: 4.44 percent.
  • 60-month period: 5.98 percent.

Lenders often charge higher rates for auto loans to individuals than vehicles purchased from a dealership because they consider buying from an individual riskier than from a business. Get several quotes for the same type of loan since the three major credit bureaus count all hard pulls within a 14-day window as one.

Auto Loan Interest Rates by Lender

Shop around for auto loans, and you’ll notice that the lender you choose makes a difference. The following table shows the starting interest rates for both new and used cars from several lenders.

Lender New car purchase starting APR Used car purchase starting APR
Bank of America auto loan 2.39% APR 2.59% APR
USAA auto loan 1.89% APR 2.79% APR
US Bank auto loan 2.59% APR 2.59% APR

Because banks set their own minimum auto loan borrowing rates, you should compare offers before deciding. Find out your APR and the monthly payment from multiple lenders, and compare them to find the best deal for you.

Credit Union Interest Rates

Credit unions typically charge lower fees and have higher interest rates

on savings accounts and loans, while banks have more advanced mobile apps and online technology.

Credit unions are non-profit financial institutions that are member-owned and member-run operated by members. Some of them strive to keep their fees as low as possible, set their interest rates as high as possible on savings, and set their interest rates as low as possible on loans.

Product All CUs (National Average Rate) All Banks (National Average Rate)
5 Year CD-10K 1.56 1.12
4 Year CD-10K 1.42 1.00
3 Year CD-10K 1.30 0.91
2 Year CD-10K 1.15 0.79
1 Year CD-10K 0.95 0.63
6 Month CD-10K 0.65 0.41
3 Month CD-10K 0.40 0.27
Money market account-2.5K 0.30 0.18
Interest checking account-5K 0.11 0.11
Regular savings account-1K 0.16 0.14
Credit card, Classic 11.54 13.15
30 Year fixed-rate mortgage 3.71 3.79
15 Year fixed-rate mortgage 3.23 3.36
5/1 Year adjustable-rate mortgage 3.28 3.79
3/1 Year adjustable-rate mortgage 3.26 3.74
1 Year adjustable-rate mortgage 3.48 3.61
Unsecured fixed-rate loan, 36 months 9.28 10.21
Home equity loan, 5 year, 80% 4.65 5.21
Home equity loan, LOC, 80% 4.56 5.05
Used car loan, 48 months 3.50 5.44
Used car loan, 36 months 3.37 5.39
New car loan, 60 months 3.45 5.10
New car loan, 48 months 3.32 4.99

Bank Interest Rates


For those people having good to excellent credit, LightStream offers a variety of auto loan options, including new cars, used cars from dealers and private sellers, lease buyouts, and classic car financing.

Reports from Eone-stop shopest, that the average new car loan is over $37,000 with an intermediate 69-month term. LightStream currently offers APRs for new car loans as low as 2.49 percent (with a 0.5 percent discount for auto-playing borrowers). LightStream offers loans from $5,000 to $100,000 and can fund your loan the same day you apply (conditions apply).

LENDER LightStream
MIN. CREDIT SCORE Not specified
STARTING APR 2.49% (with autopay)
LOAN AMOUNT $5,000 to $100,000
TERM LENGTHS 36 to 84 months
MIN. ANNUAL INCOME Not specified

Bank of America: Best Big Bank Option

Apply for an auto loan that is directly from Bank of America’s website. 

We offer competitive rates, and Bank of America customers can receive additional discounts.

Benefits: Bank of America will finance a minimum of $7,500 ($8,000 in Minnesota). The Bank of America APR starts at 2.29 percent for a new car and 2.49 percent for a used car. The bank offers financing in all 50 states and Washington, D.C. The vehicle you’re financing must be no more than ten years old, with no more than 125,000 miles, and valued at no less than $6,000. Furthermore, online applications have a limited-term range – you can choose only a 48-, 60-, or 72-month term.

LENDER Bank of America
MIN. CREDIT SCORE Not specified
LOAN AMOUNT Starting at $7,500 ($8,000 in Minnesota)
TERM LENGTHS 48 to 72 months
MIN. ANNUAL INCOME Not specified
FEES Loan fee in some states

Capital One: Best for convenience

Capital One lets you borrow as little as $4,000, but you must purchase the car from a Capital One dealer.

Your auto loan and vehicle purchase can be handled by its financing department as a one-stop-shop.

You can use the Capital One Auto Navigator site to search for inventory in your area and see how various makes, models, and features will affect your monthly payment. Before you head to the dealer, this will provide you with a lot of information.

In addition, a quick prequalification allows you to check your rate via a soft inquiry, so your credit score won’t be affected.

Using Capital One auto financing means you can only shop at one of its participating dealerships, making it an unsuitable option if you find a car you love somewhere else.

LENDER Capital One
MIN. CREDIT SCORE Not specified
STARTING APR Not specified
LOAN AMOUNT Starting at $4,000
TERM LENGTHS 24 to 84 months
MIN. ANNUAL INCOME $18,000 or $21,600
FEES Late fee

Carvana: Best Fully Online Experience

Carvana is an online car-buying service that lets you pick up your purchase from a giant “car vending machine.” You can enjoy a unique experience while enjoying competitive interest rates and terms on a car loan.

You can shop for a new car with Carvana from the comfort of your home, even if you have poor credit. To qualify for Carvana, you must be at least 18 years old, earn $4,000 a year and have no active bankruptcy.

During prequalification, Carvana does not make a hard inquiry on your credit, so your credit score won’t be affected; a complex question is made when you place an order.

If you are prequalified, you will have 45 days to purchase Carvana inventory, either by picking up the car or having that delivered to you, flying to the car, then driving it back to Carvana.

LENDER Carvana
MIN. CREDIT SCORE Not specified
LOAN AMOUNT Not specified
TERM LENGTHS Not specified
FEES Varies

myAutoLoan: Best for Shopping for Multiple Loans Offers

Autoloan is a great option for comparing multiple loan offers without spending a lot of time doing it.

You can also enter your detailed information just once and receive multiple loan offers in one place through this platform.

After completing a single online application, you’ll receive up to four quotes from different lenders. You must be 18 years of age, have an annual income of $21,600, have a FICO score of 575 or higher, and purchase a car with less than 125,000 miles and which is ten years old or newer.

Compared to other auto loans, you can pick the one with the best interest rate, loan term, and conditions that suit your budget and your needs without having to shop around.

You may have a higher interest rate if you have bad credit. It is, noted that this platform is available in most states but not in Alaska or Hawaii.

LENDER myAutoLoan
LOAN AMOUNT Starting at $8,000
TERM LENGTHS 24 to 84 months
FEES Not specified

Tips for Veterans to Get a Better Interest Rate

Veterans loans are insured by the Department of Veterans Affairs and available to most vets, active-duty military, reservists as well as members of the National Guard and surviving spouses of deceased veterans.

Improve Your Credit Score

Your credit scores heavily influence the VA mortgage rate.

Even though you can qualify for a VA car loan with less-than-perfect credit, rates tend to go down as your credit score rises.

You can also consider your credit score and credit report before you speak with lenders. Overdue bills, credit cards maxed out, and incorrect information could drag you down. However, the credit problems, and with patience and diligence, you may be rewarded with a better rate.

Related Article: How Does a Secured Auto Loan Work?

Look for 0% APR Financing

A lender typically charges you interest on a vehicle loan in exchange for financing. Lenders make money primarily through interest and fees. Your lender reimburses you for the money the auto dealer paid the lender on your behalf as you repay the loan.

The lender also makes money from the interest you pay.

However, an auto loan with a zero APR is essentially a free loan. As long as, when you make your monthly payments on time, the lender receives a reimbursement for the money it paid to the dealer. However, there is no extra money that you are putting into the lender’s bank account.

Shop to Compare Different Lenders

You can compare offers from multiple lenders, including big banks, local banks, credit unions, and online lenders. These offers will vary according to your credit score, rate requirements, terms, etc.

Add a Cosigner

Cosigners can be added to a car loan you already have – you have to refinance it! Even though it sounds simple, not everyone qualifies for auto loan refinancing. If you want to include a cosigner, you must meet the lender’s requirements individually.

For your cosigner to be considered, they must have a good credit score – typically in the 700s or lower.

Secondly, the lender will calculate the cosigner’s debt to income ratio, which means that, in addition to meeting the income requirements, the cosigner has to have enough income to cover the loan repayments.

The cosigner can sign the new loan with you if they meet all the requirements. In addition to saving you money, having a cosigner may help you qualify for a better interest rate.

Make a More Significant Down Payment

Generally, it would be best if you strived to put down at least 20% of the purchase price of a new car, and a 10% down payment is recommended for used vehicles.

You can put down as much as you can without draining your savings or fund if you can’t afford the recommended amount. Your position will be better when you drive away if you put more down on a car.

Shorten Your Repayment Term

A lower interest rate is usually associated with more down payment.

You signal to lenders that you are a lower-risk borrower by putting down a substantial down payment and financing less purchase price.

Furthermore, with a lower loan amount, you can probably get a shorter term and pay less interest over the life of the loan.

Reduce Your Monthly Payments

If you put more down, you will need less financing, and you will pay the loan off sooner.

Your monthly payment will decrease by $15 to $18 per $1,000 of down payment.

Using our car loan interest rate calculator, you can determine your monthly payments based on different down payment amounts.

Auto Loan Interest Rates: The Bottom Line

Historically low-interest rates on mortgages and new car loans have driven unprecedented demand for new loans in recent years, especially for home purchases, driving up home prices in many parts of the country.

Auto loans grew surprisingly well despite lower commuting, leisure, and vacation-related driving needs during the pandemic.

The credit card interest rate has remained dramatically higher over time than other loan types, mainly due to the unsecured and transactional nature of that type of revolving loan product. Despite fewer total card balances subject to interest than in the past due to reduced spending and stimulus payments, growing numbers of consumers are expected to be affected by high credit card interest rates in the coming year.

It is also possible that a surge in demand for goods and services would result after the pandemic subsides, causing higher card spending and revolving balances.

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