A bad annual percentage rate (APR) for a car loan is generally above 10%. Rates this high increase your monthly payments and total interest costs over the life of the loan.
APR includes the interest rate plus any fees charged by the lender. For example, a $20,000 loan at 15% APR over five years costs $4,986 in interest. The same loan at 5% APR costs just $1,218 in interest-a $3,768 difference.
| Credit Tier | Average APR Range |
|---|---|
| Super Prime (720+ score) | 3.5% - 5.5% |
| Prime (661-719 score) | 5.5% - 7.5% |
| Nonprime (620-660 score) | 9% - 13% |
| Subprime (580-619 score) | 14% - 19% |
| Deep Subprime (below 580 score) | 19% - 36% |
Sources: Experian State of the Automotive Finance Market Q2 2023 and Federal Reserve Consumer Credit Report Q2 2023.
Lenders charge higher APRs to offset risk. Borrowers with low credit scores, unstable income, or thin credit histories face the highest rates. Dealerships may also offer "special financing" with deceptive terms that hide bad APRs behind low monthly payments.
Many borrowers confuse APR with interest rate, but APR includes fees. A $300 origination fee on a 5% interest rate loan becomes a 5.7% APR. Some lenders advertise low interest rates but load fees onto the APR, making direct comparisons difficult.
Another mistake is assuming dealership financing offers the best rates. While convenient, dealerships often mark up APRs by 2-3 percentage points above what you qualify for directly through a bank or credit union.
Improving your credit score before applying lowers your APR. Paying down credit card balances, correcting errors on your credit report, and avoiding new credit applications can raise your score quickly. When shopping for loans, compare APRs-not just monthly payments-from at least three lenders.