If you’re planning to finance a vehicle, you may be wondering: what is a good interest rate for a car loan? In 2025, this question is more relevant than ever especially as auto prices continue to climb and lending standards grow stricter. Fortunately, by understanding how car loan interest rates work, you can avoid overpaying.
As a result, you’ll be in a better position to make smarter financial decisions and potentially save thousands over the life of your loan.In this guide, we’ll clearly explain what rates to expect, which factors influence them, and, most importantly, how to lock in the lowest rate possible.
Why It’s Crucial to Know a Good Car Loan Interest Rate
Before choosing a lender, it’s essential to understand how even a small change in your interest rate can affect your wallet. Interest rates determine the extra amount you’ll pay on top of the car’s price.
Consider this:
At 4%, a $25,000 loan over five years will cost you $2,625 in interest.
At 7%, that same loan will cost $4,690.
As you can see, knowing what is a good interest rate for a car loan can lead to major savings.
Average Car Loan Interest Rates in 2025
So, what’s considered a good rate today? It often depends on your credit score, the type of car, and loan term. Below are the average car loan interest rates in 2025 by credit score:
| Credit Score Range | New Car Loan | Used Car Loan |
|---|---|---|
| 781–850 (Excellent) | 4.5% | 5.8% |
| 661–780 (Good) | 6.0% | 7.5% |
| 601–660 (Fair) | 9.0% | 11.0% |
| 501–600 (Poor) | 13.5% | 17.0% |
| 300–500 (Very Poor) | 18%+ | 21%+ |
Tip: A good rate is typically below 6% for new cars and below 8% for used cars, assuming you have at least fair credit.
What Affects Your Car Loan Interest Rate?
Knowing what determines a good interest rate for a car loan helps you prepare and potentially lower your rate. Let’s explore the key factors:
1. Your Credit Score Has a Big Impact
The better your credit score, the more favorable your rate. Lenders view high scores as a sign of low risk, meaning you’re more likely to repay on time. Therefore, improving your score before applying is highly recommended.
2. Loan Term Influences Interest Rate
Longer loan terms (60–84 months) may have slightly higher rates. While they lower your monthly payment, you’ll end up paying more interest overall. Shorter terms, in contrast, often come with better rates.
3. New vs. Used Vehicles
Interest rates for used cars tend to be higher than those for new cars. Used vehicles depreciate less, but lenders consider them riskier.
4. The Lender You Choose
Banks, credit unions, and dealerships offer different rates. According to Bankrate, credit unions often have lower car loan interest rates than dealerships or banks.
5. Down Payment Amount
A larger down payment lowers your loan to value ratio, making you a less risky borrower. As a result, lenders are more willing to offer you a lower rate.
How to Get the Best Car Loan Interest Rate
Now that you understand what is a good interest rate for a car loan, let’s explore how to actually get the best one possible.
1. Improve Your Credit Score
Start by checking your credit report for errors and paying down existing debt. Even a 20-point improvement can help you qualify for a significantly lower rate.
2. Get Pre Approved
Getting pre approved before you shop allows you to compare loan offers and gives you bargaining power at the dealership.
3. Shop Around
Don’t settle for the first rate offered. Compare offers from:
Your personal bank
Online lenders
Local credit unions
Dealership financing
This way, you’ll see what’s competitive.
4. Choose a Shorter Term
Although a 72 month loan might look appealing due to lower monthly payments, it usually comes with higher interest. Choosing a 36 or 48 month term can help lower your total interest paid.
5. Negotiate with the Dealer
Yes, the interest rate is negotiable especially if you’re pre approved elsewhere. Ask the dealer to beat your existing offer. More often than not, they’ll try.
Should You Refinance an Existing Car Loan?
If rates have dropped or your credit has improved, refinancing could be a great idea. Many borrowers refinance to lower their interest rate, reduce monthly payments, or pay off the loan faster.
However, always check for prepayment penalties or refinance fees. If those costs outweigh the savings, refinancing might not be the best option.
Dealership vs. Bank: Which Offers the Best Interest Rate?
While dealership financing is convenient, it’s not always the cheapest. Dealers sometimes mark up interest rates to increase their profits.
To ensure you’re getting the best rate:
Ask for the APR, not just the rate.
Compare it with offers from your bank or credit union.
Read the fine print before signing.
Common Mistakes That Raise Your Auto Loan Interest Rate
Skipping pre approval: This weakens your bargaining position. Without it, you may end up accepting unfavorable terms.
Not comparing lenders: Failing to shop around limits your options. Consequently, you could miss out on better rates.
Choosing the longest term: Although longer terms reduce your monthly payment, they lead to more interest over time. Therefore, always weigh the total cost.
Financing extras: Add-ons like warranties and gap insurance may seem helpful, but in reality, they increase your loan amount and total interest. Instead, consider paying for them separately if needed.
Final Thoughts: What Is a Good Interest Rate for a Car Loan?
To wrap up, what is a good interest rate for a car loan largely depends on your credit score, the type of vehicle, and the loan term. However, as a general guideline, staying below 6% for new cars and 8% for used cars is a solid benchmark for most borrowers in 2025.
By taking a few smart steps such as improving your credit, comparing multiple offers, and understanding lender terms you can confidently choose a car loan that fits both your needs and your budget. Additionally, always take time to read the fine print, and above all, avoid hidden fees or costly traps that could increase your total repayment.
