Average used car loan interest rate in 2023
The average used car loan rate was 14.8% at the end of 2022, according to the Federal Reserve. But this rate is not set in stone, as rates often change and are based on various factors.
Here’s what you need to know about used car loan interest rates.
How used car loan rates are calculated
Your credit score is one factor that will affect the interest rate you receive on a used car loan. In general, a higher credit rating leads to a lower interest rate, which translates into 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 cost of borrowing.
The following table shows the average interest rate by credit score for the fourth quarter of 2022, according to a report from Experian.
| 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% |
Interest rates for used and new car loans
If you compare used car interest rates to new car interest rates, you will find that they are higher. For example, if your credit is excellent, you can expect an average interest rate for a used car of 5.99% versus 4.75% for a new car loan, according to Experian.
This is because older vehicles are not as reliable as newer vehicles, which are more expensive to repair and therefore riskier for lenders. Higher used car loan rates help protect lenders against the decline in value of your vehicle.
Your credit score and interest rates
When you apply for a used car loan, the lender will consider your credit score, just as they would with a credit card or personal loan. Your credit score is used by lenders to determine your degree of responsibility when borrowing money.
A high credit score shows (among other things) that you have a history of on-time payments and are more likely to repay your 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 are likely to get.
How to get the best rate on a used car loan
To increase your chances of getting a good interest rate on a used car loan, follow these tips.
- Improve your credit: Before you apply for a used car loan, work on raising your credit score. Pay your bills on time, keep your debt load low, and only apply for new credit when you absolutely need it.
- Add a co-signer: If you have a friend or family member with good or excellent credit, you might consider asking them to co-sign your used car loan. This can increase your chances of approval and lower your rate.
- Make a big down payment: The more money you invest, the less you will need to borrow and the lower the risk you pose to the lender. Save for a large down payment if you can.
- Reduce your debt-to-income ratio (DTI): Your DTI is your monthly debt payments divided by your gross or pre-tax monthly income. If you’re paying off debt, you can lower your DTI ratio and potentially get a lower loan rate.
- Choose a cheaper car: It can be tempting to buy a used car with all the accessories, but it can lead to a higher loan amount. A more affordable option can make it easier to lock in a lower loan amount and interest rate.
How do used car loans work?
Used car loans are usually offered by banks, credit unions, and online lenders. Another option is to get a loan from a dealer who may have relationships with multiple lenders and can help you find the best rate.
Once you’ve taken out a used car loan, you agree to repay what you borrow over a set period of time, plus interest and fees. Typically, you’ll do this via monthly loan payments over 24 months to 84 months, depending on the lender and terms you choose.
Remember that while a longer term will result in lower payments, you will pay more interest. This could put you upside down on your loan since you now owe more than the value of the car.
Auto Loans vs. Personal Loans
If the vehicle you are interested in is an older model or has over 120,000 miles on the odometer, you may need to consider a personal loan instead of an auto loan.
Typically, personal loans are unsecured, so interest rates tend to be higher than car loan rates. If you take out a loan for a used car, the loan is secured by the vehicle, so interest rates are generally lower.
Related: Learn more about get a personal loan
How to get a used car loan
Follow these five steps to get a used car loan:
- Find a used car: First, you will 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.
- Compare the prices: Research and compare used car loan interest rates from multiple lenders. Most lenders will allow you to prequalify and verify your loan offers without any impact on your credit.
- Choose a loan: Ideally, you’ll choose the used car loan that offers the lowest interest rate and the 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 physical store. Be prepared to submit documents, such as pay stubs and bank statements, along with details of 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’ve gone with an online lender.
Related: Learn more about get a personal loan
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