When it comes to auto loans, the annual percentage rate (APR) is one of the most important factors to consider. The APR represents the total cost of borrowing money and includes both the interest rate and any fees associated with the loan. So is 2.9% a good APR for a car loan? Let’s take a closer look.
What is APR?
APR stands for annual percentage rate. It is the cost of credit expressed as a yearly rate. The APR includes the interest rate plus any fees or additional costs associated with the loan. For example, a loan with a 10% interest rate and a 5% origination fee would have an APR higher than 10%. The APR allows borrowers to compare loans with different terms and costs.
The APR allows you to compare loans with different interest rates and fees. By law, lenders are required to disclose the APR to give borrowers a standardized way to compare the true cost of loans. Focusing only on the interest rate can be misleading, so the APR gives you a more complete picture.
What is a good APR for a car loan?
What qualifies as a “good” APR depends on the current auto loan rates, the borrower’s credit score, the loan term, and other factors. Here are some general guidelines for good APRs on car loans today:
- For new cars, 2.9%-5% APR is typically considered good for borrowers with excellent credit (scores above 740).
- For used cars, 3.9%-6% APR is typically good for those with very good to excellent scores (680-740+).
- For borrowers with average credit in the low 700s, anything under 8% could be a decent rate.
- For those with fair credit (640-679 scores), 12% or below is generally acceptable.
However, it’s important to compare rates from multiple lenders. Online lenders and credit unions may offer better rates than traditional banks. Rates also vary based on loan term. Longer loans of 5-6 years may have lower rates than shorter 3-year loans.
Current Auto Loan Interest Rates
According to Bankrate’s national survey of lenders, here are the latest average interest rates for new and used car loans by credit score tier:
| Credit Tier | New Car Loan | Used Car Loan |
|---|---|---|
| Excellent (720+) | 4.21% | 4.44% |
| Good (680-719) | 5.76% | 6.32% |
| Average (640-679) | 10.12% | 11.21% |
| Poor (<640) | 16.30% | 18.17% |
Based on these current average rates, a 2.9% APR would be considered excellent for both new and used cars.
Pros of a Low APR Car Loan
There are many benefits of securing a low APR on your auto loan:
- Save money on interest. The lower the APR, the less interest you pay over the life of the loan. Even small differences in APRs can add up to hundreds of dollars on a $25,000, 5-year loan.
- Lower monthly payments. Lower interest equates to lower payments each month, freeing up cash in your budget.
- Allows you to borrow more. If monthly payments fit your budget better than a large down payment, lower APRs let you finance more of the vehicle price (up to certain loan-to-value limits).
- Shorter loan term. The savings from lower interest rates means you can opt for a 36 or 48-month loan instead of 60 months to pay off the balance faster.
- Build credit. Responsibly managing an auto loan helps strengthen your credit profile for better rates in the future.
How to Get the Lowest APR on a Car Loan
Here are some tips for securing the best APR when financing a car purchase:
- Check your credit. Good credit scores in the 690+ range are key to unlocking the lowest rates. Review credit reports from Equifax, Experian and TransUnion and resolve any errors.
- Shop lenders. Compare rates from banks, credit unions, and online lenders. Getting pre-qualified quotes from multiple sources gives you negotiating power.
- Put down 20% or more. Large down payments reduce the amount financed so lenders view you as less risky.
- Opt for shorter terms. You’ll pay less interest over 3-4 years rather than 5-6 years.
- Take advantage of sales incentives. Manufacturers often subsidize rates or offer cash allowances during sales events.
- Consider a co-signer. Adding a co-signer with excellent credit may help you qualify for the lowest rates.
Online tools like AutoPay and MyAutoLoan can help streamline the process of finding the best APR loan offers.
What is the Downside of a High APR Car Loan?
While lower is better when it comes to auto loan APRs, here are some specific drawbacks of agreeing to a higher interest rate:
- You’ll pay more interest charges over the life of the loan, increasing the total cost.
- Higher monthly payments make it harder to budget for other expenses.
- Longer loan terms to reduce payments mean you continue owing debt for years.
- You may be underwater if you want to trade in or sell the car before repaying the loan.
- High rates due to poor credit make it harder to refinance later.
- Excess interest limits how much car you can actually afford to finance.
For example, on a $25,000, 5-year car loan:
| APR | Monthly Payment | Total Interest |
|---|---|---|
| 4% | $468 | $1,615 |
| 8% | $495 | $4,752 |
| 15% | $554 | $10,633 |
As you can see, the higher interest rate loans cost significantly more over the 5 year repayment. It pays to improve your credit and shop around for the best rate possible.
When is a High APR Unavoidable?
Unfortunately, some borrowers have little choice but to accept a higher APR due to poor credit or urgent transportation needs. Here are some scenarios when you may be forced to take a subprime loan:
- Credit score under 620. Lenders view you as a high-risk borrower.
- Little or no credit history. With no track record, lenders are unsure of your ability to repay.
- Applying for a loan from a buy here, pay here dealership or other subprime lender.
- In immediate need of a car and have limited financing options.
- Buying an older used car that doesn’t qualify for manufacturer incentives.
If your credit is damaged, concentrating on rebuilding your score can help you qualify for lower rates down the road. Pay all bills on time, pay down balances, and resolve any reporting errors.
Alternatives to High Interest Auto Loans
Before resigning yourself to a sky-high interest car loan, be sure to explore these options:
- Buy an inexpensive used car with cash – Avoid financing altogether and pay cash for a cheaper used vehicle until you can improve your credit.
- Ask a relative to co-sign – A friend or family member with good credit can help you qualify for a lower rate.
- Take public transportation – Is buying a car absolutely necessary or can you get by with other options for a while?
- Save up a larger down payment – Putting down more money upfront results in lower loan balances and interest.
- Apply through a credit union – Credit unions frequently offer better rates and more flexibility than traditional banks.
While not always feasible, exploring these alternatives before accepting a high-interest loan can potentially save you thousands of dollars over the long run.
Should I Ever Take Out a Car Loan with a High APR?
Here are some things to consider if debating a high-APR auto loan:
- How urgent is your need for a car? Can it wait while you work on improving your credit or saving up?
- How long will you keep this car before paying it off or trading it in? The longer you keep it, the more that high interest rate hurts.
- Will you be able to refinance to a lower rate in the future? Only take the high rate if it’s temporary.
- How affordable are the monthly payments? Don’t stretch your budget to the breaking point.
- Have you tried all options to secure a lower APR, like using a co-signer or pledging collateral?
While not ideal, it may make sense to accept a higher interest rate auto loan if you don’t qualify for anything lower but urgently need reliable transportation. Just be sure to refinance and pay off the balance as quickly as possible.
Conclusion
Overall, a 2.9% APR on a car loan is very good in today’s market, especially for borrowers with strong credit scores. Lower APR auto loans save money on interest payments, allow you to finance more, and help build your credit profile. Before accepting any APR, compare loan offers from multiple lenders. If you have no choice but to take a high interest rate due to poor credit, focus on rebuilding your score so you can refinance as soon as possible. Weigh all options carefully and run the numbers to make sure a high APR loan is affordable and makes sense for your situation.