The interest rate on a car loan is subject to several factors. Lenders base internal institutional interest rates on benchmark rates controlled by the Federal Reserve and major financial institutions. They then scale these internal lending rates up and down based on the borrower's credit history and place of residence. Data providing the average rates on car loans changes constantly due to these underlying factors.
The national average interest rate on car loans fluctuates based on the current prime interest rate. Lenders that finance auto loans then add a margin to the prime rate to set their particular interest rate. The prime rate refers to the lowest interest rate banks offer to borrowers with the best credit. Prime rates are in turn affected by the actions of the Federal Reserve, especially the current federal funds rate. The federal funds rate is the interest rate banks charge banks to borrow funds overnight.
At the time of this publication, the average rate on a car loan for a borrower with average credit was 4.31 percent for a 60-month new car loan and 5.15 percent for a 36-month used car loan. The Federal Reserve Board of Governors reported the prime rate for the same day as being 3.25 percent. These rates tend to move in tandem, so they'll rise and fall together based on current economic conditions.
Average interest rates on car loans vary by region. For example, as of this publication, Texas residents with a credit score in the national average range of 660-689, who obtain a 60-month auto loan, paid an average interest rate of 6.531 percent. Conversely, the same borrower in California paid 6.841 percent on a loan of the same term. The average interest at the same date was 6.06 percent in Massachusetts and 6.209 percent in Georgia.
Interest rates offered to borrowers on car loans differ significantly based on credit history. Borrowers on the lower rungs of the credit score ladder pay an average of five times higher in interest rates than borrowers with the best credit. For example, as of publication, the national average interest rate on car loans for those with the best credit history was 3.17 percent. Individuals at the bottom of the credit score brackets paid an average of 15.377 percent in interest on a car loan.
Lenders use a tier system to match borrowers with interest rates. Tier 1 generally is for borrowers with credit scores of 720 or above. This group gets the lowest current rates. Tier 2 is for borrowers with credit scores that generally range from 700 to 719. Lower tiers are categorized by a 20-30 credit score point separation and the interest rates increase correspondingly. For example, borrowers in the fourth tier with credit scores ranging from 630-699 can expect to pay twice the interest rate of those in the top tier. Thus, one means of obtaining a better rate on an auto loan is to pay attention to what tier your credit score falls in and take action to increase it.
- Bankrate: Auto Interest Rate Roundup
- FRB: H.15 -- Selected Interest Rates, Web-Only Update -- March 17, 2015
- HSH Associates: Average Rates for New and Used Auto Loans
- MyFICO: How Much Will Your FICO Score Save You on Your Next Car?
- The Wall Street Journal: What a Fed Move Would Mean for Your Loan Rates
- Edmunds: Car Financing in a Recovered Economy