How Your Credit Score Determines Your Auto Loan APR

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Artem Shadrin /

Keeping track of your credit score is critical if you plan to apply for any kind of loan — having a great credit score can get you the best loans with the best rates. That said, don’t assume that if you have marginal credit you’ll qualify only for a bad credit auto loan.

An auto loan is a term loan, which means you make payments over a fixed period of time, such as 48 or 60 months. Over this term, you pay back the amount of money you borrowed — called the principal — as well as interest, which is what the lender charges for the use of its money.

The annual percentage rate is how much interest you pay on a yearly basis, and it’s based on a number of factors, including your credit score. You want the lowest APR you can find because it will cost you less long-term, so make sure you negotiate the most favorable rate with your car dealer.

How Credit Scores Are Calculated

Your credit score is determined by five different measures of your financials. See how much weight each has on your score:

  • Payment history, or how consistent you are about paying your bills, counts for 35 percent.
  • Debts owed, or how much you owe on credit cards, loans and other types of accounts, counts for 30 percent.
  • Credit history, or length of time you’ve actively used credit, counts for 15 percent.
  • New credit, or how many new lines of credit you’ve opened, counts for 10 percent.
  • Types of credit you have, like revolving or installment accounts, counts for 10 percent.

Your credit score is not based on your assets, income or employment. The lender, however, might take those factors into consideration when reviewing the loan.

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Learn More: What Is a Good Credit Score?

APRs for Different Credit Scores

APRs for different credit scores will vary across lenders. myFICO breaks down its credit scoring and corresponding APRs for a 60-month loan on a new car into six categories. Note how much lower the rate is for borrowers with the highest scores than those with the lowest:

How Your Credit Score Determines Your Auto Loan APR
Score Range APR (%)
720-850  3.719
 690-719  5.071
 660-689  7.139
 620-659  9.882
 590-619  14.135
 500-589  15.297
Rates accurate as of Oct. 10, 2017

Know Your Credit Scores

Three different credit reporting agencies keep track of consumer credit scores — Experian, TransUnion and Equifax — and your score from each might differ slightly because not all lenders report to all three. Before applying for a car loan, print out your credit scores — assuming they’re good — so you can use them to get the best loan rate possible. Knowing your current scores from all three will enable you to begin the auto loan application process with confidence.

Buy a New Car to Get a Lower Rate

New cars have lower interest rates than used cars for several reasons. A lender can easily determine the value of a new car, but used car values vary widely based on mileage, age, upkeep and maintenance. A used car is likely a riskier loan, so the lender compensates for that risk by charging higher interest rates.

Auto manufacturers want you to buy new cars and are willing to incentivize potential buyers with new car deals, including lower interest rates. Used car dealerships typically don’t offer this type of thing.

Check Out: New and Used Car Loan Interests Explained

A Good DTI Ratio Can Lower Your APR

Excellent credit will definitely get you a lower APR, but so might having a favorable debt-to-income ratio, which lenders also use to estimate your ability to repay the loan. Your debt-to-income ratio is simply your monthly debt obligations — including loans, utilities and rent or mortgage — divided by your gross monthly income.

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Making a sizeable down payment on your auto loan can also get you a lower rate. By putting more down, you become a lower-risk borrower because you have your own equity in the vehicle when you buy it and are less likely to default on the loan. In addition, you are less likely to end up owing more on the vehicle than it’s worth.

See: 12 Best Credit Unions for Car Loans

Lower Your Interest Rate With a Shorter Loan Term

If you opt for a shorter term car loan, say 36 months instead of 60 months, the lender will most likely give you a lower interest rate. When you choose a shorter loan term, the lender gets its principal paid back more quickly — and you have less time to default on the loan.

Get GAP Insurance

If you’re upside down in a loan — meaning you owe more on the car than it’s worth — GAP insurance protects you. If you’re upside down in your loan and the car is totaled, you would still be responsible for paying the difference between what you owe to the lender and what you received from the insurance company. That increases your debt-to-income ratio and could be an issue when you want to finance a replacement vehicle. GAP insurance pays off the remaining balance of the auto loan — whenever you finance a car, it’s a good idea to get it.

Next Up: Top 7 Hidden Costs of Taking Out an Auto Loan

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