Used Car Auto Loan Rates Excellent Credit – Everyone knows cars are expensive (not to mention sales taxes), but people rarely know how their credit score affects the final price they pay. Paying for a new vehicle often requires finding financing, usually through a lender in the form of auto loans. The interest associated with the loan could cost you thousands of dollars more. What determines your interest rate? Your credit score. What is a credit score? Your credit score is a three-digit number that gives lenders an estimate of your ability to manage your credit and repay your loan. Three consumer credit reporting agencies (Equifax, Experian and TransUnion) provide you with the financing information and payment history that ultimately generates your score. Although FICO is not the only score shown in the table, it typically appears when you fill out a credit application because it is one of the most commonly used scores by most financial institutions in the United States. Every consumer has a FICO score between 300 and 850. Your credit score shows up in the credit comparison because your bank or credit union (or car dealer or credit card company) uses it to determine whether or not you should borrow money, whether it’s a personal loan , credit card, student loan, refinancing an existing car loan or line of credit. If you have excellent credit, you will benefit from better conditions, such as a competitive rate or a larger credit amount. What do lenders look for in a credit score? In short: creditors want to be paid. The dealer, bank or credit union is trying to estimate how likely it is that you will be able to pay them back. They do this by conducting a risk assessment based on your credit history and current finances, largely based on your FICO credit score. This score is based on information from your credit report and the current monthly payment schedule from all existing credit sources. There are five main elements that make up your credit score, each with a different weight. Payment History — 35% How well you have followed your monthly payment plans, credit card payments, and loan terms as a previous borrower makes up a large part of your credit score. Late or missed payments, mortgage defaults and bankruptcies all hurt this part of your credit report, but paying off a loan early or keeping your credit card balance low will help you get a better credit score. Outstanding debts — 30% Obviously, the less debt you have, the better your chances of getting a loan. The more you owe, the harder it will be to pay it all off. This score may be called a “credit utilization score.” Of the outstanding credit you have (your current credit card, student loan, etc.), you ideally want to use less than 30% of your total available credit. Length of credit history – 14% Have you been borrowing for a long time? A long history of responsible credit use is good for your credit score, which is obviously much harder to obtain in your 20s. This explains why older generations generally have the best credit scores. How often you use your cards also plays a role. If you have a credit card, use it sparingly to show that you can handle your debt responsibly. Account age — 10% Your age isn’t the only year that matters. Having a long-term, established credit history on any account can lead to an excellent credit score. However, if you open a number of new credit cards in a short period of time, it will lower your overall FICO score. Lenders will wonder if you can repay the debt if you suddenly choose to max out all those cards. Additionally, even less known, you also don’t want to take out a line of credit before even applying for a car loan. Types of Credit Used – 10% From a lender’s perspective, variety is good, so paying off a credit card balance as you use it and paying off the student loan automatically every month shows that you can manage different types of debt. Lenders want to ensure that a borrower has a history of reliably using multiple sources of credit. What is a good credit score for a car loan? Although lenders may set their own standards when evaluating a person’s FICO score, these are the standards typically accepted by many lenders. According to Experian, “higher scores represent better credit decisions and can give lenders more confidence that you will repay your future debts as agreed.” So, what is a “good” credit score? Anything above 700 will at least put borrowers in a good position to get car loans. Once you achieve a score above 800, you can virtually be assured of excellent credit and an ace up your sleeve when negotiating your APR and loan terms. However, if your credit score is above 600 and below 750, you’ll be on par with most borrowers. The average credit score in America is 657. How do I check my credit score? If you don’t already check your credit score regularly, you can request a free report regularly. If there are any surprises or “cracks” on your credit report that may be incorrect, you can go directly to Equifax, TransUnion, or Experian to correct what could be negatively affecting it. Do I need to get pre-approved for my car loan? It’s not a bad idea to get pre-approved for a car loan from a bank or credit union before you even shop at a dealership. Getting pre-approved ensures you have a loan to cover the cost of the car you want. It’s also a nice negotiating tool with the dealer, because they know you’re serious about buying a car and the dealer wants to close the sale. Another good reason to get pre-approved will help prevent any car dealer you visit from losing your good credit. According to blog.credit.com, “Auto loan applications submitted within a short period of time (usually 14 or 45 days, depending on the credit scoring model used) should count as one application.” However, some of our readers discovered that their credit scores dropped after several car dealers submitted credit applications for financing. This is another reason why it’s a good idea to get pre-approved before going to the dealer. Can I Still Get a Car Loan with Bad Credit? Yes, credit is an important factor in getting a car loan, but you should keep in mind that most dealers actually want to sell you a car. They are often willing to work with you to make this possible. Nerdwallet points out that “…at the end of 2017, the average credit score for a new car loan was 713 and 656 for a used car loan, according to a report from Experian. But according to Experian, nearly 20% of car loans are made to borrowers with a credit score below 600. Nearly 4% go to people with a score below 500.” While you may be able to get a car loan with less than great credit, this can can have a pretty big impact on your maximum loan amount, the loan term, or the annual percentage rate. So the worse your credit, the higher the rate, the longer the monthly payment schedule may be, and the less money you can borrow for your new (or new-to-you ) vehicle. Depending on your credit score, the interest rate you get can vary significantly. In fact, the difference between interest rates on a new car loan for someone with excellent credit versus someone with very poor credit can vary by as much as ten percentage points. Use our 3-step loan calculator to determine interest rate difference For example, if your excellent credit qualifies you for a 6% interest rate on a $18,000 vehicle, instead of the 12% interest rate of less than stellar credit. you qualify for will save you more than $50 every month over the five-year term of the car loan. That’s $3,000 in savings thanks to your good credit! When it comes to buying a car, your credit score plays a major role in the type of financing available to you. For people with a good score, this works to your advantage. You may be in the perfect position to get a car loan. For those with lower scores or
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