While this will improve your chances of approval, it still doesn’t tell you how your credit score affects auto loan interest rates. Your credit score is relative, and not all lenders view it the same way. This means that even if your credit score is subpar, you can still be approved for an auto loan. To ensure that you also get the best interest rate possible, you need to understand how it is affected by your credit score.
Keeping Up with Your Credit Score
There are several types of credit scores for each of the 3 credit reporting agencies. These range from your FICO score to proprietary ones from Experian, Equifax and TransUnion.
This information is included in your complete credit report, and is also used to compile your FICO score. Buy Here Pay Here lots and other car dealerships will pay close attention to,
- Any missed or past due payments on previous bad credit auto loans.
- Vehicle repossessions.
- Bankruptcy was declared on an auto loan.
If any of these items are listed in your credit report, even if your FICO score is above subpar your auto loan might still come with higher interest rates.
What’s in a Credit Report
It’s important for you to know what your current credit score is, before you start shopping around for auto loans with the best interest rates.
The formulas for calculating your credit score will vary, which is why it is important to keep up with all 3 of your credit reports. A low score on one report can affect the interest rate offered with the auto loan. Your credit score is determined by the following,
- 35 percent: your payment history.
- 30 percent: amount of debt owed.
- 15 percent: length of time accounts have been active.
- 10 percent: number of new lines of credit opened.
- 10 percent: type of different credit accounts.
Knowing what your credit score is before you start applying for auto loans will give you the opportunity to repair problem areas or dispute any errors, and this can result in lower interest rates.
Higher Credit Scores Equal Lower Auto Loan Interest Rates
If you do have a good or excellent credit score you should expect to be offered a low interest auto loan. This is because potential lenders will see you as less of a risk. Your high credit score indicates that you can manage your finances, and are more likely to repay the auto loan in full and on time. The low interest rate on the car loan is your reward for having a good credit score.
When you are looking at your 3 credit reports you might notice that your scores vary slightly, and this is due to the different formulas used by the reporting agencies. In most instances the variations are minor, and your scores will be close enough to be considered in the same range.
A tier system is used to determine what range your credit score falls in, and typically the higher it is the lower the interest rate on an auto loan.
- 750 and higher: Excellent
- 700 – 749: Good
- 650-699: Fair
- 550-649: Poor
- 550 and lower: Bad
The economy, where you live and who you are applying for financing with will also factor into determining the auto loan interest rate. Typically, you should expect an interest rate (APR) less than 3.5 percent if you have excellent credit. If your credit is bad the interest rate on the auto loan could be as high as 15 percent.
The high interest rates often result in you paying more than the vehicle is worth, which results in an “upside-down” auto loan.
How to Lower Auto Loan Interest Rates with Bad Credit
Just because your credit is less than perfect, this doesn’t necessarily mean that you are stuck with a high interest auto loan. There are a few things that you can do to lower the interest rate. One of the most important is to take a copy of your current credit score with you to the Buy Here Pay Here dealership. This lets the financing officer know that you are aware of your credit score and the interest rates it generally garners.
Vehicle age
A vehicle’s age will play a role in the interest rate. Older vehicles might come with a lower sticker price, but you will also be paying a significantly higher interest rate. This is true even if you have good or excellent credit.
This can decrease your chances for loan approval, especially if you have poor credit. If you are approved, the auto loan often has a high interest rate.
If you cannot secure financing for a new vehicle with your subpar credit score, you should consider applying for a used car auto loan. This might also help you qualify for lower interest rates, though you do want to avoid financing a vehicle older than 5 years.
Income to debt ratio
Your income compared to the amount of debt you owe can raise or lower auto loan interest rates. Potential lenders will take this into account when they are reviewing your auto loan application. Lenders use this to estimate your ability to make the monthly payments on time.
To calculate your income to debt ratio simply total all monthly bills and divide it by gross monthly salary.
Length of the loan
Auto loans can vary in length, and the longer the term the higher the interest rate. The term refers to the amount of time you have to pay off the loan typically,
- 36 months
- 46 months
- 60 months
If the term is longer than 5 years, you typically end up paying back more than the vehicle is worth. This is due to the high interest rates that come with long term auto loans.
Down payment
The size of the down payment does matter, especially if you want to get a low interest rate on an auto loan.
The reason the size of the down payment matters is that it affects how potential lenders see you. If you only have a small down payment, you are often seen as more of a risk. This is true whether you have an excellent or poor credit score. A larger down payment is seen as less of a risk, and this might help you qualify for lower interest rates.
The Final Word
Your poor credit doesn’t have to mean that you are stuck paying higher interest rates every time you apply for a car loan. It’s also important to note that excellent FICO scores don’t automatically guarantee low interest rates. Potential lenders consider several aspects of your financial history that include your credit score.
It is important to do your research and “shop around” before accepting any bad credit auto loan offer. Not only will this help ensure that you are getting the best interest rate, it also reduces your chances of falling for any potential auto loan scams.