Need new wheels? Unless you can afford an all-cash purchase, your credit score is going to have a major impact on whether you’re able to get a good deal on a car. Buyers with bad credit may end up paying $150 or more per month on their auto loan than someone with excellent credit, according to data from myFICO.
Eighty-six percent of people buying new cars rely on financing, according to credit scoring agency Experian, with a typical loan amount of nearly $30,000. Someone with a credit score in the excellent range (between 720 and 850) could score a 48-month auto loan for that amount with an interest rate of 3.27% and a monthly payment of $668. A buyer with credit score in the 620 to 659 range would pay $752 a month at a rate of 9.4%, per the myFICO loan savings calculator.
Subprime borrowers will shell out the most to buy a new car. A person with a credit score in the 500 to 589 range might be offered a $30,000 loan at 14.91% interest, which translates to a monthly payment of $834. And that’s assuming they can find someone willing to loan them $30K in the first place.
Clearly, having better credit can pay off big when shopping for a vehicle. Over the life of a four-year loan, the buyer with sparkling credit will pay $2,045 in interest. Someone with mediocre credit will shell out an extra $4,060, and the subprime borrower will pay $7,967 more, for a total of $10,012 in interest.
The financial picture is even worse for used car buyers, especially those with poor credit. Though people borrow less when buying used cars, interest rates are generally a bit higher, in part because people are more likely to default on these loans, MarketWatch reported. Used car buyers with poor credit are hit with a bigger penalty than prime borrowers.
Someone with excellent credit who borrows $18,550 to buy a used car (the average amount financed, per Experian), will pay 3.74% in interest on a 48-month loan, 0.5% more than if they were buying a new vehicle. The borrower whose credit score falls below 590 will pay 16.28%, or 1.37% more than if they were borrowing $30,000 to buy a new vehicle.
After looking at all those numbers, the path to a cheaper car loan is clear. Boosting your credit score by as little as 10 points may help you save hundreds of dollars over the life of your loan. The more you can increase your score, the more you can save.
While credit repair isn’t always a quick and easy process, especially if your score is low, even a few small changes to your financial habits can help you boost that all-important number. Paying your bills on time is a big one, as is reducing your debt. Fixing errors on your credit report and not using too much of your available credit will also help.
Whether you have excellent or just so-so credit, forewarned is forearmed if you hope to get the best deal when car shopping. Experts suggest prospective buyers get pre-approved for a car loan before they visit a dealership, since it gives them more negotiating power.
“Go ahead and get pre-approved (for an auto loan) so you already have an idea what you would qualify for within your bank,” Melinda Zabritski, senior product director of automotive finance for the credit bureau Experian, told Bankrate. “It gives the dealer something to beat.”
Knowing how much it will cost you to borrow can also guide your car shopping experience. You won’t torture yourself by test-driving a luxury car once you realize you’ll have to pay double-digit interest on the purchase.
Who you borrow money from also matters. Community and regional banks charge higher car loan rates than national banks, according to a recent WalletHub study. Rates at national banks were lower, but credit unions offered the best deal. The average interest rate for a 36-month new car loan financed through a credit union was 2.49%, compared to 4.09% at a national bank and 5.33% at a community or small bank. Dealer financing, while convenient, isn’t always the best deal, despite those 0% interest teaser rates.
“Instead of using lot financing, approach a bank or, even better, a credit union and inquire about financing options,” Andreas Rauterkus, an associate professor of accounting and finance at the University of Alabama at Birmingham, told WalletHub. “Credit unions generally offer the lowest rates. Don’t fall for the easy monthly payment options offered by a lot of used car dealers.”
All buyers should do their homework before they start shopping around for a car. “A lot of car financing deals are offered to you assuming you have no idea what kind of loan you can get,” Rauterkus said. “Information is the strongest negotiation tool.”