What Is a Good APR for a Car Loan?

The average price for a new car in America is a whopping $48,000, according to recent data. And even for used cars, the average sits close to $30,000.

The vast majority of us cannot afford to pay cash for vehicles, so we rely on auto loans. Borrowing funds to pay for a vehicle is always going to cost money in interest and fees, which is measured in “APR.” 

But what is APR, exactly, and what is a good APR for a car loan?

What is APR?

APR stands for annual percentage rate. It’s a measure of the cost of borrowing money, expressed as a percentage. It includes the interest rate and certain fees. 

For example, an APR of 10% means that borrowing money will cost 10% per year. In this case, a $20,000 loan would cost $2,000 in interest and fees per year. 

APR is similar to interest rate, but the difference is that APR also includes certain fees. APR is a very accurate measure of how much it costs in total to borrow money because it accounts for both the interest you pay as well as certain fees.  

APR will generally be slightly higher than the interest rate because APR includes fees. So a car loan might have an interest rate of 7% and an APR of 7.25%. 

How is APR calculated for my car loan?

APR for a car loan is calculated based on the borrower's credit score and creditworthiness. The better your credit score, the lower the APR will typically be.

Another factor is whether you’re buying a new car or a used car. In general, APR for new vehicles tends to be lower than it is for used vehicles. 

APR will be clearly listed on your loan agreement. Lenders are required to clearly list the APR and explain the borrowing costs.

The range of APRs for car loans varies significantly. For very well-qualified borrowers, rates can be as low as around 2%. For those with poor credit, rates can range all the way up to 25% or more. 

In some cases, auto dealerships may even offer 0% APR to qualified borrowers. This is sometimes done as a promotion to sell more vehicles and is a way for borrowers to get an interest-free loan. 

What is a good APR for a car loan?

So, what is a good APR for a car loan? That all depends on your credit score and whether you’re buying a new or used vehicle. 

Remember, APRs are generally lower for new cars, and will always be lower for well-qualified borrowers. 

To get an idea of what you might expect to pay, we can look at average APRs on auto loans. 

Average auto loan APR by credit score

As of mid-2022, these are the average APRs for auto loans:

Credit score range - Average APR for new car - Average APR for used car

781-850 - 2.96% - 3.68%

661-780 - 4.03% - 5.53%

601-660 - 6.57% - 10.33%

501-600 - 9.75% - 16.85%

300-500 - 12.84% - 20.43%

Source: Experian Information Solutions via Nerdwallet

To get an idea of the rate you might pay, you’ll first want to check your credit score. From there, you can compare your score to the chart above to see a rough estimate of the APR you might be offered.

However, to get an accurate estimate of the APR you’ll be offered, it’s necessary to apply for a loan or seek preapproval from your lender. 

Auto loans are offered by auto dealerships, banks, credit unions, and online lenders. It’s always a good idea to compare several different lenders to get the best deal. 

Why APR matters

APR is important because it dictates how much it will cost to borrow money. And even a relatively small difference in APR can make a significant difference. 

For example, compare these two auto loans. Both are 5-year loans with $20,000 borrowed:

• Car loan A has an 8% APR

  • Monthly payments will be $406

  • The total cost over the life of the loan will be $24,332

• Car loan B has a 6% APR

  • Monthly payments will be $387

  • The total cost over the life of the loan will be $23,200

As you can see, the difference between a 6% and 8% APR is significant. The higher-interest loan will end up costing $1,132 more over the life of the loan. 

How can I find the best APR for my car loan?

Finding the best APR is important in order to avoid overpaying for your auto loan. Here’s how to find the best car loan APR.

Comparison shop

It’s always a good idea to shop around for the best rates. Auto loans are offered by dealerships, banks, credit unions and online lenders — and APRs can vary significantly. 

Many lenders allow borrowers to seek preapproval before formally applying for the loan. Getting preapproved will help you see an estimate of the APR you’ll be offered, and it will result in a soft credit pull which won’t affect your credit score. 

Before you purchase a vehicle, it’s wise to get a rate quote from at least 2-3 different lenders. You may be surprised at the difference in APRs between your various options. 

Improve your credit

If you’re not happy with the rates you’re being offered, it’s worth putting some effort into boosting your credit score. Remember, the better your score, the lower your APR will be. Improving your score starts with understanding credit scoring factors, then taking actionable steps toward improving the factors that are most relevant to you. 

Keep in mind that an auto loan can actually benefit your credit score over time, as long as you make on-time payments each month. 

Negotiate with the dealer

If you’re buying through a dealership, you may have some bargaining power to negotiate the car loan. Dealerships may be able to offer you a discounted APR, or even a discount on the purchase price of the vehicle itself. 

For best results, explain to the sales representative that you’re looking for the best deal possible — and that you are willing to go to another dealership if you don’t get a satisfactory offer. Be polite and respectful, but don’t be afraid to play hardball with your negotiations. 

Wait for promotions

If you’re buying a new vehicle, it may be worthwhile to wait for a dealer or manufacturer promotion. There are often limited-time deals when dealers offer discounted APRs to encourage vehicle sales. In some cases, dealers even offer 0% APR loans. 

These promotions often come out around the fall, right when next year’s models are released. The promotions often apply to the current year or previous year’s models. For instance, in fall of 2022, dealerships might run promotions for those buying 2022 models. 

APR matters for credit card debt, too 

APR is important for auto loans, but really it’s important for any type of loan or debt. In fact, it might be most important for high-interest debt like credit cards. 

If you have credit card debt, it’s worth considering consolidating your debt into a lower-interest loan or line of credit. This can help you save money on interest. 

Tally* is an app that helps qualifying Americans consolidate credit card balances into a lower-interest line of credit. Learn how Tally works here. 

*To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.