How Your Credit Score Impacts Your Auto Loan

Are you in the market for some new wheels? Buying a vehicle in the fall, especially from October to December, is a prime time for deals due to dealerships clearing out current-year inventory to make room for new models and meet annual sales goals. But overall price is not the only consideration. If you will be financing your purchase, you need to think about how to get the best auto loan deal you can. Have you considered the role your credit score plays in the process?

How credit scores affect car loan interest rates

Your credit score is a three-digit representation of how you’ve handled credit in the past. It’s based on information in your credit report, including whether you’ve missed payments before or if you’re currently behind on your existing loans. 

A higher credit score generally translates to lower loan rates, whether you’re applying for a mortgage, credit card, or auto loan. Lenders want to know you’re likely to repay the loan on time and in full. If your credit score reflects a history of on-time payments, lenders often view you as a lower risk. On the other hand, a lower credit score often indicates difficulty making payments in the past. Lenders typically charge a higher interest rate to offset some of the risk that you might not finish paying the loan.

In most cases, your credit score is the biggest factor influencing your overall car loan interest rate.

Tips to secure a lower car loan interest rate

To save money on interest and potentially qualify for the best possible car loan rates, consider the following actions:

• Improve your credit score: Review your credit report for errors and dispute inaccuracies. If mistakes on your report are dragging your score down, fixing them gives you a boost. Other ways to improve your credit history include making on-time payments, paying down some of your revolving credit lines and avoiding taking on new debt ahead of car shopping.
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• Compare lenders:Some online lenders can provide you with pre-qualification and a car loan rate quote without making a hard inquiry on your credit. Compare rates and terms from three to five lenders to determine where you might get the best deal. Consider banks, credit unions, dealer financing and online lenders.
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• Offer a down payment:If you have money saved, consider making a down payment. A trade-in might also be considered part of your down payment. Find out if trading in a vehicle and making a down payment can get you a lower interest rate.
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• Review your budget and choose a shorter loan term:Instead of agreeing to the longest loan term, which might be up to 84 months, review your budget to see if you can afford a higher payment with a lower interest rate. For example, you might have a higher monthly payment if you choose a 48-month loan instead of a 72-month loan, but the lender might give you a break on the interest rate. Over time, the combination of a lower rate and a shorter term might save you hundreds of dollars.
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• Use a cosigner:If you don’t qualify for a lower interest rate on your own due to your credit score, consider finding a cosigner. A cosigner with good credit might be willing to take responsibility for your loan if you default. Check with the lender to see if it accepts cosigners for car loans and whether adding one could lower your interest rate.

To look at other factors that impact auto loan rates, and how often they change, you can read the full article here.

If you know your credit score is not as high as it could be, and are in a position where you can wait to make a vehicle purchase, perhaps switch your focus short term on how to bring up your score. The benefits will be worth it, as you can get a better deal on a loan and save money on interest in the long term.