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Car Loan Rates

Auto Loan Guide Step 4: How Your Credit Score Affects Your Car Loan Rates

    Seen any of those advertisements from car loan lenders offering zero-percent financing or ridiculously low car loan rates? They look like pretty good deals, don't they? And if you're looking for car loan rates, they more than likely have caught your eye. After all, the lower the car loan rates, the cheaper the loan -- which is exactly what you want. But unfortunately, unless you have an amazing credit score, you probably won't qualify for those deals (Orman 258). That's because finding low car loan rates isn't about getting lucky; it's about having a good history -- credit history, that is.

Why Your Credit Score Affects Your Car Loan Rates

    If you had the choice to lend your money to either a.) Fred, who always repays his debt on time or b.) Tom, who only pays some of his payments, which one would you choose? More than likely it's Fred, because who would give money away to someone who they didn't think would repay it on time. Come on, seriously, there's no way you would give your hard earned cash to Tom. You'd never see it again.
    And guess what, lenders feel the same way. They work hard for the money they have, and they don't want to lend it to just anyone. They need to know that they will get that money back. If they don't get that money back, they don't get a paycheck - which means they might not eat. So they have a vested interest in only giving loans to those who repay it.
    Luckily, lenders have a little tool up their sleeve. Lenders can tell whether or not you are likely to repay your car loan just by looking at your credit score. It's a great tool for lenders, but not so sweet for those with bad credit. That's because lenders penalize those who are unlikely to repay their car loans. You see, lenders still give loans to people with less than perfect credit. They just charge them much higher car loan rates. That way the profit that the lender will make from the high car loan rates is enough to make it worthwhile to take the risk of lending to someone who might not repay their loan.
    Now, if you have good credit, you are in luck. Lenders give low car loan rates to people with good credit scores. In fact, the better your credit score, the lower the car loan rates you are offered.

How Big of a Difference A Good Credit Score Makes

    To see how handy a good credit score is, let's look at an example. Let's say that Sue has a FICO score of 800 and Ellen has a FICO score of 570. Now Sue has almost as good of a credit score as you can get, and Ellen's is very low. In our example, if both women want to get a $25,000 36 month car loan, Sue's car loan rate would be 7% and Ellen's would be 15%. Now that's a big difference in car loan rates, and that big difference will be very expensive for Ellen. To borrow the same amount of money, Ellen will have to pay about $3,400 more than Sue ("Monthly Auto Loan Payment Calculator"). As you can see, having a lower credit score can really save you money.

What to do if You Have Bad Credit

    But what if you already have bad credit? Well, obviously you need a car. So you should buy a car. But don't buy a very expensive one. The more money you borrow, the more interest you will have to pay. So make a wise choice and go for a less flashy, more practical car that fits into your budget easily. Then shop around to get the lowest car loan rates you can find. After getting the car loan, make all of your payments on time and work hard to improve your credit. Once you have improved your credit score, look into refinancing your car loan. When you refinance, you may be able to get better car loan rates than the ones you have.

The Rest of Our Auto Loan Guide:


"Monthly Auto Loan Payment Calculator." 11 Oct 2006.

Orman, Suze. The Money Book for the Young, Fabulous and Broke. New York: Penguin Group, 2005