Credit Score for Car Loan: Average Rates to Expect Based on Credit Score

March 18, 2013

If you’re looking at evaluating your credit score for a car loan, you’re doing one of the best preliminary steps in “consumer credit research” that will help you plan for your next big automotive purchase. The consumer credit score (actually a collection of three scores) is critically important for going to lenders and asking them for money. Your credit score will determine the kind of offers that you get from lenders.

See what kind of interest rates you can get >>

Why Does Credit Score Affect a Car Loan?

Lenders who dole out large amounts of money to borrowers are in the business of securing their returns. This means controlling the risks that the borrower will eventually “default” on the loan, whether through bankruptcy, other financial hardship, or even a whim, and just not pay the money back. Lenders today use complicated software and other tools to manage their risk, but a lot of it just comes down to your credit score. That’s because lenders have commonly agreed that your credit score represents your general creditworthiness – as you do different things with your finances (or as things happen to your financial situation) your credit score fluctuates. A high score shows lenders that you are more likely to pay the loan back. A poor credit score is a big red flag to almost all lenders.

What Kind of Score You Need

To get “conventional” rates on auto loans, an individual usually needs a credit score above 660. Anything less, and lenders will start to look at your loan application with a bit of skepticism. These days, lenders don’t just decline your loan or demand higher rates to manage risk: lots of them do so because they can. Any dip in your credit score gives lenders the go-ahead to ask you to pay more for your borrowed money.

Rates Involved in a Conventional Car Loan…Or a Bad Credit Score Car Loan

Even the best car loan credit score situations generate interest rates a little higher than some other kinds of loans including mortgages. Where the mortgage interest rate has hovered between 4-6% in the recent past, the conventional rates for car loans have been more like 8-10%. That means if you borrow $1000.00, you’ll be paying about $100 extra per year on that principal (the initial borrowed amount) – however, for an auto loan offered to someone with a less than desirable credit score under 600, the rates are likely to be more like 15-20%. A few simple calculations will show you how this adds up over time, giving borrowers a lot of incentive to pay off their car loans within a year or two, rather than “letting it ride” for up to five or six years. One possible consequence of a long car financing contract is your chance of ending up “underwater” on your loan, meaning that over time, the value of your vehicle can depreciate quicker than you pay off the loan, leaving you with a “junk car” and a high monthly payment.

Consider these general car loan rates when you’re looking at going to a dealer or other lender to ask about short term or long term financing.

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