The average used car lo൩an rate was 14.8% at the end of 2022, according to the Federal Reserve. But this rate is not set in stone, as rates change often and are based on various factors.
Here’s what you need to know about used c𝕴ar loan interest rates.
- How used car loan rates are calculated
- Used vs. new car loan interest rates
- Your credit score and interest rates
- How to get the best rate on a used car loan
- How do used car loans work?
- How to get a used car loan
How used car loan rates are calculated
Your credit score is one factor that will impact the interest rate you receive on a used car loan. In general, a higher credit score leads to a lower interest rate, which translates to hundreds or even thousands of dollars in savings. A lower credit score, on the other hand, 💜will likely force you to settle for a higher rate, which will increase your overall borrowing cost.
The following table shows the average interest rate by credit score for Q4 202♍2, according to an ꦉExperian report.
| Credit score | Average used car interest rate |
|---|---|
| 781 to 850 | 5.99% |
| 661 to 780 | 7.83% |
| 601 to 660 | 12.08% |
| 501 to 600 | 17.46% |
| 300 to 500 | 20.62% |
Used vs. new car loan interest rates
If you compare used car interest♒ rates to new car interest rates, you’ll find that they’re higher. For example, if your credit’s excellent, you can expect an average used car interest rate of 5.99% versus a rate of 4.75% for a new c✅ar loan, according to Experian.
This is because older vehicles aren’t as reliable as newer v♕ehicles, more costly to repair, and therefore riskier for lenders. Higher used car loan rates help protect lenders against decreases in your vehicle’s value.
Your credit score and interest rates
When you apply for a used car loan, the lender will consider your credit score, just like they would with a credit card or personal loan. Your credit score is used by lenders to determine how responsible you are when🍌 you borrow money.
A high credit score shows (among other things) that you have a history of on-time payments and are more likely to repay youꦆr loan. A low credit score has the opposite effect and indicates that you may make late payments or even miss them altogether. The better your credit score, the lower the interest rates you’re likely to secure.
How to get the best rate on a used car loan
To increase your chances of landing a good interest rate 🍎on a used car loan, follow these tips.
- Improve your credit: Before you apply for a used car loan, work to increase your credit score. Pay your bills on time, keep your debt levels low, and only apply for new credit when you absolutely need to.
- Add a cosigner: If you have a friend or family member with good or excellent credit, you might consider asking them to cosign your used auto loan. This can increase your chances of approval and lower your rate.
- Make a large down payment: The more money you put down, the less you’ll need to borrow, and the lower the risk you pose for the lender. Save up for a large down payment if you can.
- Lower your debt-to-income (DTI) ratio: Your DTI is your monthly debt payments divided by your gross, or pretax, monthly income. If you pay off some debt, you can reduce your DTI ratio and potentially land a lower loan rate.
- Choose a less expensive car: It might be tempting to purchase a used car with all the bells and whistles, but doing so can lead to a higher loan amount. A more affordable option may make it easier to lock in a lower loan amount and interest rate.
How do used car loans work?
Use🍌d car loans are typically offered by banks, credit unions,♍ and online lenders. Another option is to get a loan through a dealer who may have relationships with multiple lenders and can help you find the best rate.
Once you take out a used car loan, 🀅you agree to repay what you borrow over a set period, plus interest and fees. Typically, you’ll do so via🥃 monthly loan payments over 24 months to 84 months, depending on the lender and the terms you choose.
Keep in mind that while a longer term will lead to low💛er payments, you’ll pay more interest. This could result in you becoming upside down on your loan since you now owe more than the car is worth🎃.
Auto loans vs. personal loans
If the vehicle you have your eye on is an older model or has over 120,000 miles on the c♒lock, you may 𝄹have to look into a personal loan instead of an auto loan.
Typically, personal loans are unsecured, so interest rates tend to be higher than auto loa𝄹n rates. If you take out a used car loan, the loan is secured ✱by the vehicle, so interest rates are usually lower.
How to get a used car loan
Follow these five steps to get a used car loan:
- Find a used car: First and foremost, you’ll need to decide on the used car you want. Use websites like Edmunds and Kelley Blue Book to explore your options and determine fair market values.
- Shop around: Research and compare used car loan interest rates from multiple lenders. Most lenders will let you prequalify and check your loan offers without any impact to your credit.
- Choose a loan: Ideally, you’d go with the used car loan that offers the lowest interest rate and shortest term. This will save you the most on your used car purchase.
- Apply: Depending on the lender, you can apply online or in person at a brick-and-mortar location. Be prepared to submit documents, like pay stubs and bank statements, as well as details about the vehicle you wish to purchase.
- Get approved: In general, lenders approve applications fairly quickly. You shouldn’t have to wait long for a decision and funding, especially if you went with an online lender.