Images by Getty Images/Illustration by Hunter Newton/Bankrate
If you have been holding off on buying a new vehicle, 2025 could be the right time to visit your local dealership. Bankrate Chief Financial Analyst Greg McBride predicts that rates will ease for most borrowers in 2025, though the high-rate environment will persist for bad-credit borrowers. Increased competition between lenders may help drivers get a good rate.
Bank auto loan rates showed little in the way of improvement in 2024 but expect that to rev up in 2025 as the economy motors along, banks look to spur loan demand, and the Fed helps by cutting interest rates further.
— Greg McBride, Bankrate Chief Financial Analyst
- The highest auto loan rate in 2024 was 8.58 percent for a four-year used car loan in the months of February and July.
- The lowest auto loan rate in 2024 was 7.41 percent for a four-year used car loan in late October.
- Bankrate’s expert predicts that by the end of 2025, five-year new car loan rates will reach an average of 7.0 percent and four-year used car loans, 7.75 percent.
What happened to auto loan rates in 2024
The Federal Reserve’s choice to cut short-term interest rates wrote the story on auto loan rates this year. When the Fed first cut rates in September, auto loan rates started a gradual decline. This is in contrast to last year when borrowers were met with climbing interest rates driven by the four rate hikes in 2023. As of late 2024, the Fed has lowered rates three times, which will help to continue bringing rates down into 2025.
Changes have been minimal so far. Looking back, average rates stayed within the same percentage point from the year’s start to its end. In early 2024, average rates for new and used vehicles were 6.73 percent and 11.91 percent, respectively, according to Experian. The third quarter brought similar rates, 6.61 percent for new and 11.74 percent for used.
Drivers’ biggest savings might not come from rates alone
Although several factors drive interest rates, including moves made by the Federal Reserve, your credit has the most influence on the rate you’re offered. For example, prime borrowers in the third quarter secured an average rate of 6.70 percent for new cars compared to subprime borrowers with an average of 13.00 percent, according to Experian. But as McBride points out, there are factors beyond interest rates you should pay attention to in 2025.
“Your biggest savings may not come from the interest rate perspective,” McBride shares.
You can save by shopping for a lower-priced vehicle or opting for a used car instead of a new one. McBride also recommends tapping into vehicle incentives, which can help offset high interest rates. Cox Automotive data from the fourth quarter found that incentives accounted for 8 percent of average transaction prices — compared to just 5.7 percent in January.
3 expert tips to get a 0% car loan
Drivers with strong credit can get a competitive deal with some forethought and flexibility. As a reporter covering auto loans for the past three years, I sat down with two experts to get the inside scoop on how drivers can find the best deal for their next vehicle purchase.
Learn more
Serious auto loan delinquencies are at a 14-year high, according to data from the Federal Reserve Bank of New York, and bad-credit borrowers will continue to face the double whammy of steep rates and expensive vehicle prices. Lenders have a limited risk appetite and won’t be competing for bad-credit borrowers’ business.
“What’s really driven up car payments in recent years hasn’t been the interest rates. It’s been car prices and the amounts that borrowers are financing,” McBride clarifies.
A recent report from the Federal Reserve confirmed this by crunching the numbers to determine what drove higher car payments. It found that a 1 percent shift in the size of the loan directly correlates to a 1 percent change in the monthly payments, while interest rates had far less impact. So, larger loan amounts are the reason for the steep increase in borrowers’ monthly payments.
Simply, the report states, “Although the reasons differ, higher interest rates do not appear to explain the higher monthly payments for any borrower.”
For those with less-than-perfect credit, shopping around for a less expensive car can be the key to saving money. The less you finance, the more quickly you can pay off the loan and the more money you will have in your wallet the next time you’re in the market for a car.
“The bigger picture is, you want to focus on breaking the cycle of your car payments,” McBride shares. “You do want to get to a point where you have the vehicle longer than you have the loan, and the more months you have where you don’t have car payments, that’s more months you can be building up savings for a larger down payment on the next one and that snowballs in a positive way.”
Improving your credit score will also mean better rates and lower payments next time you shop.
Next steps for consumers
The truth is, there is no perfect time to finance a new vehicle, and expensive costs can make it challenging for some to find a good deal. But McBride has simple advice for shoppers.
“Whatever steps you can take to improve your credit before you’re in the market for a vehicle loan is going to do more to reduce your interest costs than anything the Federal Reserve does, McBride says.
Follow these tips to keep your budget healthy and find the best deal on your car purchase.
- Stay current on credit card and loan payments — a history of timely payments boosts your credit score, qualifying you for lower auto loan rates.
- Shop with a few auto loan lenders to see which offers you the best deal.
- Take advantage of any seasonal deals dealerships offer.
- Be flexible. With less inventory, you may need to come prepared with backup car colors or models.
- Expand your search to several dealerships and research manufacturer’s suggested retail prices before you head in for a test drive.
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