Shopping for new car can be a euphoric experience. So many new models, so much promise and, of course, there’s the dopamine rush associated with buying anything new in general.
These factors often cause people to jump into the process before conducting the proper research, which can leave them open to unpleasant financial surprises. With this in mind, it’s particularly important to understand how your credit score affects the cost of your car.
How Your Credit Score Is Calculated
Ranging from a low of 300 to a high of 850, the FICO credit score is a measure of your perceived creditworthiness, based upon the way you’ve handled credit accounts in the past. Among the key considerations ranked by the FICO score are how much debt you have, how you tend to repay your debts, and the types of debt you have.
Lenders report those activities to the big three credit reporting bureaus (Experian, Equifax and TransUnion). A three digit “score” is assigned to you based upon the information in those reports.
The Higher the Better
According to FICO, anything above 669 is a good score, anything above 739 is very good and anything above 799 is exceptional. Reviewing the table of car loan interest rates and credit scores below will show you why this is important.
Auto Loan Rates in July 2020
Credit Score New Car Loan Used Car Loan Refinance Car Loan
750 or higher 4.78% 5.03% 4.09%
700-749 5.01% 5.26% 4.61%
600-699 7.11% 7.36% 6.69%
451-599 18.77% 9.02% 11.44%
450 or lower n/a
Source: US News & World Report
What this Means in Dollars and Cents
Simply put, a car loan as well as the total price of the car against which that loan is written will be less costly for people who have strong credit scores. They will be more costly for those whose credit scores can stand improvement. After all, a single percentage point can add up to a significant amount of money over a 60-month term or longer.
Running the numbers through a good finance calculator will reveal this quite readily. Let’s say the price of the car you’re after is $35,000 including taxes, license fees and etc. You’re making a $7,000 down payment and you want to finance the car over a period of 60 months.
A credit score of 750 or higher would get you an interest rate of 4.78 percent on a new car, which translates to a monthly payment of $525.58. Your total cost would be $38,534.80 when those payments are multiplied over 60 months.
However, you’ll be looking at 18.77 percent — if you can get financed — with a 599 credit score. This will saddle you with a $722.80 monthly payment. Multiplied over 60 months, your total purchase price would be $50,368.
The Bottom Line
Your credit score plays a pivotal role in what you’ll pay for loans. This is particularly evident when manufacturers tout special financing deals such as zero percent interest. Reading the fine print on those offers reveals the best financing and lease deals are reserved for those with the strongest credit histories.
Meanwhile, most mainstream lenders are reluctant to work with individuals whose credit scores are in the “poor” range — 580 or below. This means those shoppers must turn to so-called sub-prime lenders who impose extremely high interest rates. Dealers who both sell and finance cars for people with marginal credit usually charge more for the cars as well, their reasoning being you won’t have many other options.
And frankly, that’s the most significant consequence of all when it comes to how your credit score affects the cost of your car. The lower your score, the fewer purchase alternatives you’ll have available.