Is a 17% Interest Rate High for a Car?
Is 17% a high car loan interest rate? Understand its true impact on your vehicle financing and ownership.
A car loan interest rate, often expressed as an Annual Percentage Rate (APR), is the cost of borrowing money to finance a vehicle. It is a percentage of the loan amount paid to the lender in addition to the principal. This rate significantly impacts the total amount spent on a car over the loan’s life. Understanding interest rates and their influences is important for informed vehicle purchase decisions.
Factors Influencing Car Loan Interest Rates
Several variables determine the interest rate a lender offers for a car loan. A borrower’s credit score and history are primary considerations; a higher credit score indicates a lower risk to lenders, leading to more favorable interest rates. Lenders assess past payment behavior and overall creditworthiness to gauge repayment likelihood.
The loan term also influences the interest rate. Longer loan terms come with higher interest rates because they extend the period over which the lender is exposed to risk, even if monthly payments appear lower. Whether the vehicle is new or used affects the rate. Loans for used cars have higher interest rates due to the higher risk associated with their depreciation and potential for mechanical issues.
A larger down payment reduces the principal loan amount, which lowers the lender’s risk and results in a more attractive interest rate. Broader economic conditions, such as prevailing market rates and Federal Reserve policies, also play a role in shaping auto loan interest rates across the industry. These factors collectively determine the specific rate an applicant receives.
Assessing a 17% Interest Rate
A 17% interest rate for a car loan is considered very high. In the first quarter of 2025, the overall average auto loan interest rate was 6.73% for new cars and 11.87% for used cars. Even for borrowers with “subprime” credit (scores from 501 to 600), average rates in early 2025 were around 13.22% for new cars and 18.99% for used cars. This places a 17% rate at the higher end, even for individuals with a challenging credit profile.
Such a rate implies lenders perceive significant risk in lending to the borrower. This elevated risk can stem from a lower credit score, limited or inconsistent credit history, or past financial difficulties like delinquencies or bankruptcies. Lenders compensate for this increased risk by charging a higher interest rate. Consequently, a substantial portion of early loan payments will be allocated to interest rather than reducing the principal balance.
This means the borrower pays down the actual cost of the car at a slower pace, increasing the total cost of the vehicle over time. A 17% rate indicates that the borrower falls into a category where access to more affordable financing is limited, highlighting the importance of understanding underlying credit factors.
Understanding the Total Cost of a Car Loan
The interest rate significantly influences the overall cost of a car loan, extending beyond the vehicle’s sticker price. The total amount paid for a car loan combines the principal, interest rate, and loan term. While monthly payments might seem manageable, a high interest rate like 17% increases the total interest paid over the loan’s duration. This means a larger portion of each payment goes towards the cost of borrowing money, rather than reducing the initial amount borrowed.
For example, on a $25,000 car loan over 60 months, a 5% interest rate might result in total interest paid of $3,300. In contrast, the same $25,000 loan at a 17% interest rate over 60 months leads to total interest exceeding $12,000. This difference illustrates how a high interest rate makes the vehicle more expensive than its purchase price. The total expenditure on the car becomes higher, impacting a borrower’s long-term financial health.
This calculation underscores why understanding the total cost, not just the monthly payment, is important when evaluating a car loan offer. The impact of a high interest rate compounds over time, leading to thousands of dollars in additional costs.
Steps to Potentially Improve Your Car Loan Rate
Individuals seeking a more favorable car loan rate have several strategies to consider. Building a stronger credit score is a primary step, involving consistently paying all bills on time, reducing existing debt, and regularly checking credit reports for inaccuracies. An improved credit profile signals lower risk to lenders, making better rates more accessible.
Shopping around for lenders is also important; obtaining quotes from multiple banks, credit unions, and online lenders reveals a wider range of interest rates and terms. This comparison allows borrowers to select the most competitive offer for their financial situation. Making a larger down payment on the vehicle also reduces the loan amount and the perceived risk for lenders, leading to a lower interest rate.
Opting for a shorter loan term, if financially feasible, results in a lower interest rate, though it will increase the monthly payment. Another option is to consider a co-signer with a strong credit history, which helps secure approval or a better rate if the borrower’s credit is not ideal. For those already holding a high-interest car loan, refinancing the existing loan is an option once credit improves or market conditions become more favorable.