Jennifer Moore
If you’re buying a car, whether it be new or used, you’ll most likely need to pursue financing to help you manage the purchase. And while auto financing provides a great way to get you behind the wheel or a car you love that will get you safely from point A to point B, these loans don’t come for free (unless of course, you are fortunate enough to borrow money from a family member or friend).
And, understanding the various interest rates out there can be confusing. Some lenders have higher or lower rates than others. You may also be chatting with a colleague only to find out they were offered a better—or worse—interest rate than what you are seeing. So, what does drive car loan rates up or down? We’ve got the intel you need to ensure you’re in the know.
Factors That Drive Your Car Loan Rate Up or Down
Before we get into the factors that can influence your car loan, let’s start by level-setting on the current average auto loan interest rates in the U.S. A recent article by CNN shared that toward the end of 2023, the average car loan interest rate was 7.18% for new vehicles and 11.93% for used vehicles.
And since many consumers today lean toward purchasing a used car to save on depreciation, the natural question is—why is the interest rate higher on a used car than on a new one? The answer is that lenders can find it more challenging to place a value on a used car than on a new one. For example, a new car typically comes fresh from the factory—with little to no mileage, hasn’t been in an accident, etc.
But with a used car, you can get a mixed bag. You can have two vehicles with the same make, model, and production year, one with 15,000 miles on it, and one with 80,000 miles on it, and the chances are that the one with the higher mileage will come with a higher interest rate. That said, it really all depends on the lender and how they value the vehicle.
But some other things can really impact your interest rate, and some you can control more than others. Here’s the inside scoop.
Your Financial Health
Your credit score is a big deal when it comes to getting a car loan. A high score means you're good at managing your money, which makes lenders more likely to offer you lower rates. Bringing collateral, like a down payment, or having a co-signer with a good credit history can also help secure a better rate. Essentially, the better your financial health looks, the better your chance of getting the lowest loan car rate.
The Down Payment You Make
The more money you put down upfront on your new car, the less risky the loan is for the lender. This usually results in a lower interest rate because you're borrowing less money than the car's value. Additionally, a significant down payment could mean you'll pay less overall interest because the total amount you need to borrow is reduced.
The Repayment Period and Structure of the Loan
Longer loan terms might mean smaller monthly payments, but they usually have higher interest rates. This is because the lender risks more over a longer period. On the other hand, shorter loan terms often have lower interest rates but higher monthly payments. Understanding how the length and structure of your loan affect your rates can help you choose the best option for your budget.
Macroeconomic Factors Like Inflation
Inflation affects everything, including car loan rates. When inflation is high, interest rates generally go up. This is because lenders need to make adjustments to ensure they’re making a profit despite the decreasing value of money. And because inflation has been high in recent years, it is important to keep an eye on economic conditions. This can give you an idea of when rates might increase or decrease.
However, a word of warning here. While you want to pay attention to what is happening at the Fed in terms of inflation rates, know that it can take a long time for the needle to move. If you are pinched for money and are paying a high-interest rate or need to lessen your monthly expenses, refinancing might be a good choice despite what’s going on in the economy.
Whether You Shop Different Rates to Get the Best One
Shopping around for your car loan is a non-negotiable. You should never settle for the first offer you see. Because different lenders offer different rates and terms, you need to know what’s available can save you a lot of money. This means checking out various banks, credit unions, and online lenders. The more you look around, the better your chances of finding a favorable rate to keep your payments manageable.
Refinance Your Car Loan Today with RateWorks
Are you thinking of refinancing your car? If your car meets the following criteria, then refinancing can save you some money.
- Less than 140,000 miles
- More than three payments have been made toward the car loan
- The vehicle is under ten years old
Does your car qualify? If so, you might, too. Request a free quote today to get started. We look forward to saving you some money.
