What is an average interest rate for a car loan?

When you’re searching for a car loan, it can be helpful to have an idea of the average interest rate charged by lenders, so you know whether the product you’re considering is competitive.

At the time of writing, the average minimum interest rate for a standard car loan on RateCity’s database is 7.26 per cent. But keep in mind, depending on your credit profile and other factors, you may not qualify for a lender’s minimum interest rate, meaning the average interest rate that’s available to you may be slightly higher.

While an average interest rate can give you a ballpark idea of how much you may expect to be charged to take out a car loan, there are many factors – in addition to your credit score – that can play a part in determining what interest rate you may be offered. These include:

• Whether you’re buying a new or used vehicle –New car loans tend to have lower interest rates than used car loans.
• Whether you choose to secure the loan – If you choose a secured car loan, the car you’re buying will be used as collateral on the loan, reducing the risk to the lender and, in many cases, reducing the interest rate you may be charged. If you choose an unsecured car loan, you may be charged a higher interest rate as the lender takes on a higher level of risk if you fail to repay the loan.
• Whether you pay an initial deposit on the loan – Choosing to pay an upfront deposit (of, say, 10 per cent of the purchase price) may help to reduce the interest rate. Again, this is due to the reduced level of risk taken on by the lender.
• What type of vehicle you’re buying – Some lenders offer green car loans for the purchase of low-emissions vehicles, generally with more competitive rates than standard car loans. At the time of writing, the average minimum interest rate for a green car loan on RateCity’s database is 6.09 per cent.

It’s also worth noting that not every will consider all of these factors when deciding what interest rate to offer you. Some may simply have a flat rate that they offer for new cars, and another they offer for used cars, with your chance of approval based on your credit score and other eligibility requirements.

Do car loan interest rates fluctuate?

Unlike home loans, car loan interest rates typically aren’t directly impacted by changes to the official cash rate. However, they do tend to fluctuate over time in response to a variety of economic conditions.

When you take out a car loan, you’ll need to choose between a fixed or variable interest rate. If you choose a fixed rate car loan, your interest rate will be locked in for the duration of the loan term. If you choose a variable rate, your interest rate may increase or decrease throughout the life of the loan.

How can I get a low interest rate on my car loan?

There are a number of ways you may be able to improve your chances of being approved for a car loan with a low interest rate, including the following:

• Prioritise your credit score – Lenders tend to reward excellent credit borrowers with their most competitive interest rate. If your credit score could use some work, consider spending some time improving it before you apply for a car loan.
• Save a deposit – If you have the financial means to save for a deposit on your car loan before you apply, you may find that you’re offered a lower rate. Plus, you could save money on interest charges over the life of the loan as a deposit will also reduce your borrow amount.
• Search and compare – Shopping around can allow you to find the most competitive interest rate available to you. But remember, a product’s interest rate isn’t the only factor you should be comparing. Be sure to take note of fees, features and other factors before making your decision. RateCity’s car loan comparison tables can help you get started.

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