Is 5.9% a Good APR for a Car Loan?

The Annual Percentage Rate (APR) on a car loan represents the total yearly cost of borrowing, expressed as a percentage. It includes the interest rate charged by the lender, along with other fees such as application, processing, origination, and administrative fees. This comprehensive figure provides a clearer picture of the true financial commitment involved in financing a vehicle.

Understanding Car Loan APR

The Annual Percentage Rate (APR) for a car loan represents the total yearly cost of borrowing money to finance a vehicle. It includes the interest rate charged by the lender, along with certain other fees and charges. These additional costs can include loan application fees, processing fees, origination fees, and administrative fees. The APR provides a standardized way to compare different loan offers, as a seemingly low interest rate might be offset by high fees. While the interest rate is the percentage paid on the principal loan amount, the APR encompasses all prepaid finance charges. If there are no additional costs or fees for establishing the loan, the APR and the interest rate may be the same. However, if fees are present, the APR will be higher than the stated interest rate, providing a more accurate representation of the total expense over the loan’s term.

Factors Influencing Car Loan APR

Several factors influence the Annual Percentage Rate (APR) a lender offers for a car loan. One significant determinant is the borrower’s credit score and history. Individuals with higher credit scores are generally seen as lower risk and qualify for more favorable, lower APRs. Conversely, lower credit scores often result in higher APRs because lenders perceive a greater risk of default.

The loan term, or the length of time to repay the loan, also impacts the APR. Longer loan terms can sometimes come with higher interest rates, even though they might result in lower monthly payments, ultimately leading to more total interest paid over the life of the loan. A larger down payment can reduce the amount borrowed and the lender’s risk, which often leads to a lower APR.

The type of vehicle, whether new or used, also affects the APR. New cars typically qualify for lower interest rates due to their consistent value, full manufacturer warranties, and lower likelihood of immediate mechanical issues, making them less risky for lenders. Used cars generally carry higher interest rates due to faster depreciation, potential for mechanical problems, and less predictable resale values. Market interest rates, influenced by economic conditions and central bank policies, play an overarching role in all lending rates. When the Federal Reserve raises its benchmark rates, auto loan rates generally tend to follow suit.

Assessing 5.9% APR

Evaluating whether a 5.9% APR is a good rate for a car loan depends heavily on current market conditions and individual financial circumstances. As of the first quarter of 2025, the average interest rate for a new car loan was 6.73%, while for used cars, it was 11.87%. This indicates that a 5.9% APR for a new car loan is below the national average, suggesting it is a competitive offer. For a used car loan, a 5.9% APR would be significantly lower than the average, making it a very competitive rate.

The individual’s credit score is a primary determinant of what constitutes a “good” APR. For borrowers with excellent credit (a score of 781 or above), the average new car APR was 5.18% in Q1 2025, and for used cars, it was 6.82%. In this context, a 5.9% APR for a new car might be slightly above the best available rates for those with super-prime credit, but still quite competitive. For a used car, 5.9% is better than the average for this credit tier.

For individuals with prime credit (scores between 661 and 780), the average new car APR was 6.70% and used car APR was 9.06% in Q1 2025. In this scenario, a 5.9% APR would be considered a very good offer for a new car and a highly competitive offer for a used car.

Borrowers with lower credit scores (e.g., subprime or deep subprime, below 600) face much higher average APRs, often ranging from 13% to over 21% for new and used cars, respectively. For these borrowers, a 5.9% APR would be a highly favorable and rare offer. The broader economic environment also contextualizes a 5.9% APR. Interest rates have generally been higher in recent years due to efforts to manage inflation. For example, the average new car loan rate increased from 4.31% in 2020 to 6.73% by Q1 2025. In an environment of rising rates, a 5.9% APR might be seen as more attractive than it would be during periods of historically low rates.

Comparing Loan Offers

Comparing loan offers requires looking beyond just the Annual Percentage Rate (APR) to understand the total financial commitment. Consider the total cost of the loan over its term and the monthly payment amount. A lower APR on a longer loan term might result in more total interest paid compared to a slightly higher APR on a shorter term.

Obtain pre-approvals from multiple lenders, such as banks, credit unions, and online lenders, before visiting a dealership. Pre-approval provides a clear understanding of the maximum loan amount, estimated monthly payment, and the interest rate you qualify for, empowering you with stronger negotiating power at the dealership. This process allows for a direct comparison of different APRs and loan terms.

Before finalizing any loan, thoroughly review the entire loan agreement. This document outlines all the terms and conditions, including the APR, the financed amount, the loan term, and the repayment schedule. Pay close attention to any additional fees, such as documentation fees, sales tax, or registration fees, and ensure they align with what was discussed. Understanding all aspects of the agreement helps prevent unexpected costs and ensures the loan terms match your expectations.