Your credit score has a major impact on the interest rate you pay for your car loan. MAJOR! There are many online tools that give your rates based upon your credit score, but before you even begin to shop let’s dig into just how important that three digit number is to your ability to get an auto loan.
The credit score predicts credit risk and for most scoring systems a high score indicates lower risk. As such, the interest rate will be lower. On the other hand, a low score indicates higher risk and you would pay higher interest rates, or be denied straight out. Those with lower scores will have to pay more to get financing.
I’ll use a car loan financed for $25,000 over 48 months and examples of credit scores with a range of 300 to 850. For a score of 750, at an interest rate of 4.8% the monthly payment is $573. For a score of 650, at an interest rate of 11.7%, the monthly payment is $655. The payment is $82 more a month for the same car at a 100-point score difference at more than twice the interest rate. The total interested paid is $6,440 or $3,936 more than the amount paid by the 750 score.
Here are the examples:
Score APR Monthly payment Total Paid Interest Paid
750 4.8% $573 $27,504 $2.504
650 11.7% $655 $31,440 $6,440
550 18.6% $742 $35,616 $10,616
It is difficult to get a car loan at a score below 640. Scores below this will be considered “subprime” and you’ll keel over when you see that an auto loan rate can get to 20%. Using the same car for $25,000 over 48 months at a subprime score of 550, the monthly payment would be $742 at an interest rate of 18.6%. You would pay $31,440 for a $25,000 car or $10,616 in interest. That is outrageous.
If your score is low, you will pay more in interest charges. If your score is very low, you may not be able to get a loan or at least not at a reasonable interest rate from a reputable company. To increase your score over time, you need to pay your bills on time consistently and don’t take on more debt. It might not be the best time to take out a car loan if you can’t get competitive rates.
John Ulzheimer is the President of Consumer Education at SmartCredit.com. the credit blogger for Mint.com. and a Contributor for the National Foundation for Credit Counseling . He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here .