Your Credit ScoreIt's no secret that a good credit score means a lower interest rate, but if you don't know what your score is, how will you know what rate is fair? If you find that your credit score isn't as good as you hoped, and you have the time, you can always work to improve it before you buy a car. A little effort could pay big dividends in the form of dollars saved over the life of your loan.
Your credit score is a three digit number that is calculated based on your credit history. While there are three national credit bureaus in the U.S., they all use the FICO score algorithm to produce their score numbers. The FICO credit score scale ranges from 300-850. The higher the number, the better off you are for securing a lower interest rate on your loan.
It's important to keep in mind that those with a deep subprime -- or "very poor" -- credit score (500 and below) can expect an APR anywhere from 14 percent to a 20 percent on a bad credit car loan.
poor credit score is always going to translate to a larger monthly payment on any approved auto loan. Lenders charge a higher interest rate to those with a lower credit score in order to offset their high default rates.
Increasing your credit score does not happen overnight, but there are steps to take to improve your credit before trying to secure a loan:
- Pay your bills on time every single month.
- Pay off credit cards with small balances.
- Don't let your larger credit card balances exceed 30% of their limit.
- Leave old debt and good accounts on your record as long as possible. If you have previously paid off a car or home, don't try to remove it from your credit report the minute it's paid off.
Shop the Loan Separately
Walking into a dealership with a guaranteed auto loan in your hand gives you bargaining power and flexibility. It also helps you avoid the common sales tactic of mixing up the vehicle price with financing costs. On the other hand, going into the dealership without doing research on how you are going to finance your purchase is setting yourself up to overpay.
Taking the automaker's low- or zero-percent financing often means having to pass on a rebate, since your choice generally is one or the other, not both. But you often can get the best of both worlds by taking the rebate from the dealer and getting financing elsewhere, even if the interest rate is higher than the promotional one from the manufacturer.
Make a Down Payment
Having a down payment isn't always a necessity, and sometimes circumstances make it impossible. That's okay. However, putting some of your own cash towards the purchase of your car helps in a couple of ways.
First, it lowers your monthly payments. Not only do you have less principle to pay back, your overall interest is lower because you're financing a smaller loan. Second, putting some of your own money in the deal is a signal to lenders that you're fiscally responsible.
Lenders will see that you not only put money aside for the purchase, but you're probably a good bet to pay back what you borrow. Lower risk for lenders usually means better loan rates for you.
Use our car payment calculator to provide you with an estimate of what you may be able to afford. The results are based on factors such as local interest rates, your credit score, and monthly income. Then, apply with our easy and fast application.
Choose a Trustworthy Loan Advisor
Finding a loan advisor who will put your best interests first is a necessary step to getting good rates. Some people have good relationships with their financial institutions and feel comfortable using them. Others might be more interested in shopping around for the best rates. And still others, maybe folks with bad credit, might have fewer options.
Limit Loan Shopping Timeframe
The timing of your car loan application is an important consideration, because it determines how your credit score is calculated. If you make all of your loan applications within a two-week period, they will only count as one inquiry. Otherwise, every time you apply for a loan, regardless of if you use it, your credit score goes down and it gets slightly more difficult to get a better loan.
You should have an idea of what kind of loan interest rates you are qualified for by the time you arrive at the dealer. We have more valuable tips and advice on getting the best deal on a car from a dealer. The more knowledgeable you are, the better equipped you'll be to negotiate.