How Credit Scores Affect Car Loan Interest Rates

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    Obtaining credit to buy a car is generally far easier than getting a loan to buy a house. In fact, even individuals with poor credit can often get auto loan financing. Having a good credit score, however, gives you more purchasing power and often lower interest rates.
    But what constitutes a good credit score when buying a car, and how much difference can it make in what you pay? Here’s what you should know.

    What is a good credit score to buy a car?

    In some ways, a good credit score is the same across the board, or at least across the credit reporting agencies of Equifax (660+), Experian (670+), and TransUnion (658+). In other ways, a good credit score for buying a car is different. That’s because it’s not that difficult to obtain financing to buy a car. A person with a fair credit score, for instance, usually can get an auto loan with little difficulty.
    The average credit score of people who buy used cars is 656, which falls into the fair range. The average credit score for those who buy new cars, on the other hand, is 717. While credit score may not impact whether an individual gets a car loan, it can impact the financing terms.

    How credit scores affect auto loan interest rates and payments

    With a higher credit score, the interest rates are lower for auto loans. This also results in lower payments due to paying less interest. Using data from Experian, one of the three main credit bureaus, here is a breakdown of how a good credit score to buy a $20,000 used car impacts rates and payments on a five-year loan in relation to other levels of credit:
    • Score of 300 to 500: 20.09% interest, $531 monthly payment
    • Score of 501 to 600: 17.36% interest, $501 monthly payment
    • Score of 601 to 660: 11.38% interest, $439 monthly payment
    • Score of 661 to 780: 6.54% interest, $392 monthly payment
    • Score of 661 to 780: 4.77% interest, $375 monthly payment
    Similar impacts of credit score on interest rates and monthly payments are apparent in the following table for a five-year loan on a $32,000 new car loan:
    • Score of 300 to 500: 14.7% interest, $756 monthly payment
    • Score of 501 to 600: 12.2% interest, $715 monthly payment
    • Score of 601 to 660: 8.12% interest, $651 monthly payment
    • Score of 661 to 780: 5.17% interest, $606 monthly payment
    • Score of 661 to 780: 4.23% interest, $593 monthly payment
    While the two tables both show a corresponding decrease in interest rates and payments with an increase in credit score, there is a major difference. Interest rates are lower with a new car purchase than with a used car purchase. It stems from how people with good credit tend to buy new cars and have lower repossession rates than the converse.

    How to buy a car with less than a good credit score

    The first rule of buying a car without a good credit score is to shop around. Financing is out there, but you want the best deal, which may not be the first offer you get. In general, in-house financing from the auto dealership comes with higher interest than that you will find elsewhere. In-house financing often does not report to the credit bureaus, which means your payments would not build better credit for future purchases.
    Check with your bank first. As you already have a relationship with your bank, and your available funds are known, a bank is often your best chance at getting auto financing without a good credit score to buy a car.

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