Interest rates are the price of taking out a loan. They vary from person to person and are mainly determined by your credit score, and other terms of the loan you take on. Since credit score is a big influencer of interest rate, it's a good idea to know where yours stands so you can see what the average interest rate you can expect might be.
Credit bureaus, like Experian, often track the average interest rate based on credit score, so it can be a good tool to use to help determine what you can look forward to. Currently, the average interest rate for vehicles from the second quarter of 2025 stands between 5% and 7.15% for borrowers with the best credit, and between 13% and 22% for those with poor credit, depending on the type of vehicle (new or used) you're financing.
What Are Interest Rates?
Interest is what a lender charges for you to take out a loan. Interest is the amount it will cost you to borrow money, expressed as a percentage. These numbers are typically expressed as an annual percentage rate, or APR. The average interest rate can depend heavily on the overall health of the economy, and your actual interest rate is based on your unique credit background. If you're determined to be at a higher risk of default for the lender, expect the interest rate to be higher.
Not all lenders offer the same kinds of interest rates. Historically, credit union auto loans have featured lower rates than bank loans. Additionally, specialized new and used car dealers can help shoppers with bad credit get financed. While there is a difference between APR and interest rates, they're often used interchangeably. Currently, the prime rate, on which all lending is based, sits at 7.5%
Types of Interest Rates
There is more than one type of interest rate you may need to know about when you're taking on a loan, but an auto loan deals with fixed interest rates and simple interest loans, which is a much more understandable way to frame a car loan than with variable interest. Here are the terms you should know:
Fixed Interest Rates
A fixed interest rate is set at a certain rate for a certain amount of time. Auto loans, for example, are typically for a set number of months at a set APR. These rates are agreed upon when you sign your contract.
Variable Interest Rates
Variable interest rates can fluctuate with the market. This means that the current prime rate rising or falling will make your loan's interest rate rise or fall. As a general rule, this isn't used for auto loans. Variable interest rates are more often associated with credit cards and some types of home loans.
Simple Interest vs. Compound Interest
Simple interest only takes into account the principal interest. Interest accrues daily based on the amount of your loan, and more money goes toward your interest payment than principal at the start of the loan.
How Interest Rates Are Determined
While your credit score is an important factor in determining your interest rate, it's not the only one that you should be mindful of.
Here are the most important factors you should know about besides credit score:
- Total income and debts
- The amount you want to finance
- The length of the loan
- The loan-to-value ratio
- Whether you're buying a new or used car
If you have bad credit, this sends a signal to the lender that you may be at a higher risk of default. As a result, your interest rate may be higher than someone with an average credit score. Most often, the lender may require you to put down a larger down payment to improve your loan-to-value ratio to approve the auto loan.
On a car loan, the interest rate may also include a markup depending on the type of financing. This represents the difference between the so-called buy rate and the sell rate. In many cases, the profit on a loan is referred to as the dealer reserve. Depending on where you live, there may be regulations governing markups.
How Is Car Loan Interest Calculated?
Nearly every car loan uses a simple interest formula, meaning your interest charges accrue daily based on your loan balance.
Each time you make a car payment, part of that payment is applied to the interest that accrued, and the rest is applied to your principal. You can ask to see an amortization schedule that outlines how much your car payment is applied to your principal and interest each month.
Over time, less of your monthly payment is being used to pay toward interest, and more is being put toward your actual loan balance or the loan principal. By the time you're near the end of your loan, a majority of your payments are applied to the principal until it’s completely paid off.
When budgeting for a car, be sure to factor in the cost of interest. For example, on a $30,000 car, a 6-year loan at 13% APR would entail over $13,000 in interest before factoring in estimated taxes and registration fees. You may discover the true cost of buying is higher than you think.
How Interest Rates Impact Borrowing and Lending
Interest rates can impact borrowers in many ways. When interest rates are high, it can discourage spending, which means that fewer consumers attempt to borrow. Things like auto loans and mortgages become more expensive to take on, causing higher prices when you need to borrow. Borrowers also pay more, and the total cost of a loan goes up. However, these consumer behaviors, which are driven by interest rates, make it more likely that people will begin saving.
When interest rates are lower, people are more likely to spend, trying to get loans to take advantage of the savings caused by a lower interest rate.
If you're trying to save money for something like a car loan, it's a good idea to do it while interest rates are up, since savings and other deposit accounts may earn you more money.
How to Make Interest Rates Work in Your Favor
To make interest work in your favor, you have to understand the impact of the national prime rate, and your individual credit situation on the interest rate you're given. Here are a few tips to help things work in your favor:
Tips for Borrowers
- To save money in interest, try to borrow when the national interest rate is lower.
- Take out the shortest loan you can afford, this will save you money in overall interest charges.
- Rate shop to find the lowest interest you may qualify for.
- Make extra loan payments whenever possible to lower your principal loan balance since interest rates accrue based on your balance.
- Opt for fixed-rate loans whenever possible so your rate won't go up if the prime rate does.
- Refinance if the interest rate comes down. Refinancing means taking on a new loan with different terms on an existing vehicle. This can be an excellent way to save money if the conditions are right.
The Bottom Line
When it comes to interest rates and auto loans, it's impossible to say what you may qualify for in every situation. At Auto Credit Express, we know that bad credit may mean higher interest rates, but it doesn't have to stand in your way when it comes to getting a car loan.
