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UPDATED: Mar 13, 2020
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If you are trying to buy a new or slightly-used car, chances are you will need an automobile loan. Few people have the cash to pay for a new car when the average price is over $30,000, according to Forbes magazine. If you have to borrow money to pay for a car, it is important to have the best credit score possible to get the lowest interest rate.
What credit score do I need to get the best car loan?
Customers with a credit score between 740 and 850 will get the best interest rates on their car loans. In fact, you typically have at least this score to qualify for most “zero percent” financing deals. The average interest rate for those with a high credit rating is around 3.9 percent today.
If your score is between 680 and 739, you will probably pay a bit more for your car loan in terms of interest. The average interest rate for a person with a good but not excellent credit score is around 4.5 percent. While this is not much more than the average interest rate for those with excellent credit ratings, it still represents a significant difference in payments over the life of the loan. If you finance $30,000 at 3.9 percent for five years, your payments will total $35,383; with a 4.5 percent rate, your payments will add up to $35,906. This means that the difference in interest rates, although small, will still save you over $500 over the life of the loan.
If your credit score is below 680, expect to pay a premium for car loan credit. These rates are known as “sub-prime” and can range from 6.5 percent to 12.9 percent or even more. For those with problematic credit, such as bankruptcy filings or foreclosures in their records, the picture is even bleaker. You may find that you are forced to do business with on-the-lot financers who charge such high interest rates that they project weekly payments instead of monthly to soften the blow of the total amount of payments.
Where can I get a good car loan?
Your interest rate will not only be affected by your credit rating but also by where you choose to take out your car loan. When you are shopping for a car, you will probably be approached by the dealership to have their financing expert run your credit report and offer you a loan. What most finance managers at car dealerships do is send your application to many different credit agencies at once through a process known as a Dealer Management System. A DMS allows the car dealership to find you a loan quickly and encourages lenders to compete for your business. However, it is not always certain that you will find the best interest rates at a car dealership.
What you are likely to find at the dealership are discounts, rebates, and other deals designed to encourage you to finance your purchase through the dealership’s lenders. Some discounts and rebates apply no matter where you finance, but others are specific to the dealership’s lenders. A new trend among dealerships and car companies has been to offer zero percent financing for a certain time period if you qualify for a loan.
Another option for your car loan is your own bank or credit union. Banks and credit unions often have good interest rates on car loans, and you will have the convenience of keeping all your business right where you bank. However, most banks and credit unions will only finance 80 percent of the purchase price of a new car, so you will probably need a significant amount in trade or down payment before you can finance through this route.
What About My Trade?
Your trade-in can reduce the amount you will have to finance, assuming you are not upside-down in the vehicle. This term refers to a situation where you owe more on the car than the trade-in value. Trade-in values are usually less than book value, so do not expect a large amount for your trade. In essence, taking a car in trade allows a dealership to sweeten your car deal; it does not usually net much money for the dealership. In fact, the majority of cars taken in trade will be taken to a wholesale auction and sold off for small amounts of money.
Beware of one trick that car dealers love to use if you are trading in, however. Many dealers will incorporate your trade into the estimate of the car’s price and financing and inflate the value of the trade while also inflating the price of the car. For example, if your trade is worth $1500 and the price of the new car is $25,000, the dealer may tell you that he will give you $5,000 for the trade, but if you read the fine print, the price of the car will now be $29,500. Many people fall into this trap, especially if they still owe money on the vehicle they are trading in.
Instead, approach the dealer with the idea of no trade and get a solid price on your new car before you ask for a valuation of your trade-in. Many dealers are willing to pay a bit more for a trade to get you into a new vehicle.
Most consumers qualify for auto financing but with today’s economy it can be difficult to find a lender if you have some credit issues. Before having potential car loan companies pull your credit report always disclose any credit issues and try to speak with a real person. Every credit inquiry lowers your score and you certainly don’t want any more negative marks on your credit report so shop around, be honest and you should be able to find an affordable car loan.