One of the first things experts advise consumer to do before shopping for a car is determine their credit scores. This is because your credit score will determine how much you will pay to borrow the money you’ll need to buy the car. This, in turn, will determine you will pay for that car altogether.
Let’s look at how your credit score affects your car loan in more detail.
What Your Credit Score Means
Derived from the information creditors supply to the big three credit reporting agencies (Experian, Equifax and TransUnion), your credit score is based upon several factors.
These include the timeliness of your payments, the amount of credit already extended on your behalf and how much of that credit is currently in use. Also considered is how long you’ve had credit accounts and the types of credit you’ve managed successfully.
The better you’ve performed in all of these areas, the higher your credit score will be.
So How Does This Affect a Car Loan?
People with higher credit scores qualify for loans at lower rates of interest. According to Bankrate.com, interest rates as determined by credit scores are as follows:
Auto Loan Rates in June 2020
Credit Score New Car Loan
750 or higher 4.35%
700-749 4.66%
600-699 5.64%
451-599 10.99%
Source: Bankrate.com
In addition to paying a higher interest rate, people with lower credit scores are often required to provide higher down payments as well. Lenders perceive borrowers with low credit scores to represent more of a risk than those who have higher scores. They often ask for more cash up front to help reduce their risk. Bottom line, people with lower credit scores pay more for cars overall.
What’s more, a low credit score can cut you out of leasing altogether.
How Much of A Difference Can This Make?
Running the numbers through a car loan calculator will help you see the affect credit scores have on car loans.
Let’s say you’re looking to finance a $30,000 2015 Dodge Charger car over 60 months. You have a $3,000 down payment and a 750 credit score.
Using the chart above, you’ll qualify for an interest rate of 4.35 percent. This would give you a monthly payment of $501.52, which means the total price you’d pay for that car would be $33,090.
Now, let’s say you have a 599 credit score. This would net you a loan at 10.99 percent interest. All other things being equal, you’d pay $586.91 a month, for a total cost of $38,394.61 — over $5,000 more.
Meanwhile, you’d pay, $317 monthly (for a total of $14,412) if you chose to lease that same car over 36 months with excellent credit, a $3,000 down payment, an agreement to keep the mileage at or below 36,000 miles and an estimated residual value of $18,600.
And again, with poor credit, a lease would be all but impossible to obtain.
What Can You Do?
The best play is to do everything possible to keep your credit score as high as you can. This means establishing a long and positive credit history, as well as always making your payments on time — ideally paying off each of your balances before finance charges accrue.
You’ll want to keep the total amount of your available credit in use below 30 percent if paying them off in full isn’t feasible. And, you’ll want to have a mix of credit accounts including credit cards, a home loan or rent and ideally, a previously held car loan with a pristine history.
If things have already gone awry in any of those areas, you’ll want to work to clean them up as much as possible to help you qualify for the best rate you can get. Ultimately, the amount you’ll pay overall, as well as whether or not you’ll even get financing, is how your credit score affects your car loan.
