How Credit Scores Influence Auto Loan Interest Rates
If you need to borrow money for a new or used car, one of the key factors you’ll need to consider is your auto loan interest rate. Your credit score can greatly influence the interest rate on your auto loan.
Your credit score reflects your creditworthiness and helps lenders gauge the risk of lending to you. The higher your credit score, the less risk you represent to lenders, which often translates to lower interest rates on your auto loan.
Understanding Auto Loan Rates by Credit Score
Here’s a basic breakdown of how credit scores can influence auto loan rates:
- Excellent Credit (750 and above): If you have a credit score of 750 or higher, you’re in a strong position. Lenders see you as a low-risk borrower, and you can often secure some of the best auto loan rates available.
- Good Credit (700 – 749): With a credit score in this range, you’re still considered a low-risk borrower. While you may not receive the absolute lowest rates, you can still enjoy competitive rates.
- Fair Credit (650 – 699): A fair credit score may result in higher auto loan interest rates.
- Low or No Credit (Below 650): If your credit score falls below 650, you might face significantly higher interest rates.
Improving Your Credit Score Before Applying
Before applying for an auto loan, take steps to improve your credit score.
Your credit score is calculated using a formula, or scoring model, but generally speaking, your credit score is influenced by five main factors: payment history, total amounts owed (including your utilization of revolving credit), the length of your credit history, new credit and inquiries, and your credit mix, which refers to the various types of credit accounts you possess.
Your credit score is calculated based on the information in your credit report. To receive your report, visit annualcreditreport.com, where you’re entitled to a free copy from each of the three credit bureaus (Experian, Equifax and TransUnion) annually. You can request all three of them at once or stagger them throughout the year. Reviewing your report will help you identify any errors that may be lowering your score. If you find an error, you may dispute it by contacting the creditor or collection agency. If unresolved, file a dispute with the credit bureau, providing supporting documents. You may also want to sign up for a credit monitoring service, which will alert you to changes in your credit profile.
Improving your credit is a gradual process. We offer many financial wellness initiatives, but a good place to start is with consistent, timely payments on your existing loans. If you’ve missed payments in the past, commit to staying current moving forward. Consider setting up autopay or reminders to ensure on-time payments. Keeping balances low is also key. If balances are high, work on paying them down. For revolving credit lines such as credit cards, aim to use no more than 30% of your available credit lines. Try to avoid taking out new loans or making unnecessary inquiries, as these can impact your credit score.
If you’re new to credit and looking to build your score, getting a starter credit card can be a great starting point. Alternatively, adding a co-signer or co-borrower to a loan can help if you lack sufficient credit history for approval. Each option has pros and cons, so research thoroughly to determine the best fit for you. Take special care and consideration to any instance where you’re involved in someone else’s credit account or adding someone to yours. In these cases, a clear understanding of responsibilities and trust is essential to uphold all necessary payments.
For more information on credit, including the difference between credit scores and reports, check out our answers to the Top 12 Credit Questions.
By understanding the link between your credit score and auto loan rates, you can take proactive steps to secure the best financing for your next vehicle. Explore our auto loan options and find out how we can help you get on the road with a great deal.
