How auto loans work

When you apply for an auto loan, you’re the borrower and will need to be approved by a lender. This can be through a bank, credit union or online lender, or the car dealership itself.

Auto loans work by providing money in a lump sum for you to buy a car. You then make fixed monthly payments on the loan (with interest) over an agreed period of time called the auto loan term — usually between 24 and 84 months. Car loans typically are "secured," meaning the lender holds the title to the car and can repossess it if you fall behind on payments. Once you've fully repaid the loan, the title is transferred to your name and you fully own the car.

To ensure you get the best loan possible, take time to shop rates with multiple lenders and compare.

How to compare auto loan rates and lenders

Many factors determine the auto loan rate you’re offered, the monthly payment and even whether your auto loan is approved. However, auto lenders often use this criteria differently, so the rate and payment you’re offered from lender to lender can vary greatly. That’s why it’s a good idea to compare lenders to find your best auto loan.

Here are some of the factors lenders use:

Your credit and financial situation

Lenders consider your income, length of employment, credit history, debt-to-income ratio, credit score and other financial factors when approving an auto loan and setting the rate.

The scoring model a lender uses can also affect whether your loan is approved and at what rate. Credit scores fall within a range of 300 to 850 on two basic scoring models, FICO and VantageScore. Some auto lenders also use industry-specific scoring on top of the basic FICO model when making auto loan decisions.

What you can do:

Check your credit report: We mentioned that credit history affects your interest rate, so make sure information in your credit report is accurate. If not, dispute any credit errors. You’re entitled to a weekly free copy of your report from each of the major reporting bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com.

Get your credit score: Credit reports from the major reporting bureaus don’t typically show your credit score, but you can often get it for free through your bank or a credit card issuer. NerdWallet offers a free credit score and report, updated weekly using TransUnion data. Knowing your credit score can give you an idea of what interest rate to expect and where to apply, since many lenders have a minimum credit score.

Find lenders that look beyond credit score: Historically, credit score has been the biggest factor in determining auto loan approval and rate. However, some lenders have expanded underwriting criteria to place greater emphasis on factors like education, meaning borrowers with less than perfect credit may qualify for competitive auto loan rates based on a bigger picture. NerdWallet auto lender reviews include several of these lenders.

Your type of vehicle and loan amount

You may have your mind set on a certain make and model of car, but it’s worth considering that vehicle choice can influence the interest rate you receive. For example, most lenders charge lower rates for new cars and higher rates for used cars. Typically, loan rates are the highest for cars purchased from a private seller.

What you can do:

Consider your car choice: This may seem obvious, but if you want to reduce your loan amount or get a lower interest rate, you might need to settle for fewer extra features or a car that's more likely to maintain its resale value.

Know that lender rate structures can differ: Some lenders, often credit unions, don’t differentiate between new, used or private party car loans, or they’re more flexible about which cars are considered new. So the interest rates they offer for a certain car type might be more competitive.

Make a down payment: The bigger a car’s price tag and the more you borrow, the greater the risk to the lender which can result in a higher interest rate. You may not be required to put money down, but making a car down payment to reduce your loan amount can help you obtain a better interest rate.

Your auto loan term

Term is the amount of time you have to repay a loan, and the most common auto loan terms are 24, 36, 48, 60, 72 and 84 months. Going with a longer-term loan may result in a lower monthly payment, but you’ll pay more in interest over the life of the loan as shown in this example chart.

» MORE: Understand the impact of terms with our auto loan calculator

What you can do:

Consider whether a shorter loan term will work: Because car prices have skyrocketed in the past several years, many car buyers are going with longer terms to lower their monthly payment. But these longer-term loans often come with higher interest rates. NerdWallet recommends limiting new car loans to 60 months and used car loans to 36 months when possible.

Pay attention to term when comparing loan offers: Sometimes lenders will stretch out the loan term to arrive at a lower monthly payment. Make sure any loans you’re comparing have the same term, because simply going with the lowest payment can cost you much more in interest overall.

Average auto loan rates by credit score

As noted above, many factors go into determining your auto loan’s APR, and rates vary from applicant to applicant. But knowing averages for auto loan rates can give you a benchmark for comparison to your own loan offers.

In the second quarter of 2024, the overall average auto loan interest rates were 6.84% for new cars and 12.01% for used cars. This is according to consumer credit reporting company Experian in its quarterly Automotive Finance Market report.

Experian also breaks down average car loan APRs by credit score, based on the VantageScore credit scoring model. The table below gives you an idea of the interest rate you might expect for your credit score range for both new and used car loans.

Current state of auto loan interest rates

People with credit scores above 780 have the best shot of getting the lowest interest rates, with credit scores below 501 typically resulting in the highest interest rates.

Some sources provide average auto loan interest rates on a monthly basis, but they aren’t broken down by credit score. In October 2024, automotive site Edmunds.com listed the average car loan interest rate for September 2024 as 7.1% APR for new car loans and 11.2% APR for used car loans. Data company Cox Automotive gave the volume-weighted average rate as 9.35% for new cars and 13.90% for used cars in its October 29, 2024, Auto Market Report. Cox Automotive rates are sales-weighted averages based on information from Dealertrack, a software used by auto dealerships.

Are current auto loan rates rising or falling?

When the Federal Reserve changes the federal funds rate, auto loan interest rates tend to march in the same direction, even though the two aren’t directly linked. Fed rate hikes that began in 2022 have now pushed car loan interest rates to their highest level in years. Below is a chart showing the recent movements of the federal funds rate:

What determines my monthly car payment?

When you know your credit score, car loan interest rate, loan term and loan amount, you can input this information into an auto loan calculator to estimate a monthly car payment. If you don’t have this information for your specific situation, Experian averages provide some insight into the recent car-financing market:

Get pre-qualified or preapproved with several lenders

Auto loan averages can be helpful research tools, but you won’t know your specific interest rate or payment amount until you receive lender offers. Auto loan pre-qualification or preapproval can help you gather information to compare and find the best auto loan. You can see which lender has the most competitive rates, offers a repayment option that works for you and is transparent about any fees and other loan details.

Some lenders use the terms “pre-qualify” and “preapprove” interchangeably, but in most cases there are important differences you should be aware of.

Pre-qualification usually requires only a limited amount of information to get an estimate of how much you qualify to borrow and at what interest rate. Often, you’ll see different options for terms and payments. Many lenders do only a soft credit inquiry for pre-qualification, which won’t affect your credit scores, but the original loan offer could change as you provide additional information.

Preapproval usually requires you to provide more personal information, such as a Social Security number, in the beginning. It’s a conditional approval of credit, pending verification of your information, and typically carries more weight than pre-qualification. It’s usually done with a hard credit inquiry, which temporarily lowers your credit scores. If you’re buying from a dealership, presenting a preapproved loan offer from another lender gives the dealership a rate to beat.

Types of auto loans

While this article focuses on financing for new and used cars, there are other types of auto loans you might want to be aware of.

New car purchase loans enable you to borrow money to buy a new car and pay it off over time. Lenders usually define a new car as one that has never been titled and is the current or previous model year.

Used or pre-owned cars are usually defined by lenders as being older than the previous model year. Loans for used cars may come with certain restrictions, such as maximum mileage or vehicle age. These loans can help you pay for a used car you buy from a dealer, from an online car retailer or from a private party.

• Lenders that offer private-party auto loans

Auto refinancing loans enable you to replace your current auto loan with a new one, usually from another lender. You may want to refinance if you think you could now qualify for a lower interest rate. Refinancing a car loan can be a way to lower your car payment or pay off your loan sooner, saving you money on the total interest you pay.

• Top lenders to refinance a car loan

Cash-out auto refinance loans work like regular refinancing, except you can borrow extra money against the equity in your car and roll that amount into the refinance loan.

• Cash-out auto refinance lenders

Lease buyout loans finance the purchase of your leased vehicle, so you can keep it or sell it to profit from any equity you have in the car.

• Top lease buyout loans

Auto loans for bad credit are offered by lenders that are more flexible about working with borrowers who have low credit scores, no credit history or past bankruptcies. Not all lenders serve this customer, and those who do charge higher interest rates.

• Bad-credit auto loans

First-time car buyer loans can be challenging to get when you have no previous car loan or credit history. But some lenders have more flexible credit requirements to help first-time car buyers qualify, although it's often with a higher interest rate.

• Five options for a first-time car buyer loan