The majority of Americans cannot afford to pay the full cost of an automobile upfront, which makes financing the vehicle an attractive option. Financing a car is basically taking out a loan and using monthly installments to pay it back. Then, once the loan is paid off, the car belongs to you, the buyer.
However, before you can take out an easy auto loan to drive off in your dream car – you need to have credit.
Having credit tells a leasing company or financial institution how reliable you will be when it comes to making your monthly payments on time and in full. Once the institution runs your credit history report, they will know three key pieces of information about you: your credit score, your payment history and how long you have had credit.
Your credit score is the most important of the three, because it determines how much interest you will be charged for your loan, and it is that interest that substantially impacts how much you pay for the vehicle as a whole.
Lower Credit Scores Mean Higher Interest Rates
If your credit score is below 600, you are considered a “subprime” or “deep subprime” borrower, depending on how far below 600 you fall. This means you are a significant risk for a lender to take on.
To lenders, a low credit score indicates that you are less likely to make payments on time and that there is a chance you will not pay off the loan at all. As such, you will pay dearly for your credit score. On average, subprime borrowers receive an average interest rate of 11 percent, which means they will pay thousands of dollars more than drivers with good credit scores for the same loan.
Deep subprime borrowers receive an average interest rate of 14 percent, which means they would pay over $10,000 more in interest on a typical $30,000/68-month loan (the average loan for a new car) than their counterparts who are in good credit standing. Fortunately, there is a way to avoid paying thousands of dollars more than you need to when purchasing a car. DMV.com recommends getting a free credit report today to check your current score and verify its accuracy. Mistakes in your credit report can lead to your receiving an unfair interest rate and having to deal with unaffordable car payments. Check your score today and take the necessary steps to improve your credit before buying.
Higher Credit Scores Mean Lower Interest Rates
Since drivers with high credit scores have a history of making payments on time and paying off their debt, they pose less of a risk for auto loan lenders. Therefore, applicants with prime and super prime credit scores, or scores between 661 and 850, receive much lower interest rates than their counterparts mentioned above. Super prime borrowers typically receive an interest rate of just 2 to 3 percent on new vehicles and 3.4 percent on used vehicles. Almost as advantageous, prime borrowers can purchase a new vehicle at an average interest rate of 4 percent for new vehicles and just over 5 percent for used vehicles.
The first step to getting a low interest rate is verifying and working on your credit score. The details you find on a free credit report can make all the difference in helping you save thousands. Check your score now.
Your Credit Score Also Affects Insurance Rates
After you’ve secured a loan for your car, it becomes time to think about auto insurance. Once again, your credit score is going to play a big role in determining your rates. Drivers with lower credit scores will have to pay higher premiums, while motorists with higher credit scores will enjoy much more affordable rates. Just like lenders, auto insurance companies view individuals with high credit scores as low risks, because research has found that car owners with good credit are less likely to file auto insurance claims, thus saving the insurer money. Make sure you are one such driver. Get on the path to saving thousands of dollars on insurance each year by checking your credit score now and taking any necessary steps to correct mistakes or problems.