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Updated on Friday, May 28, 2021
If you want to buy a car, you can probably find someone willing to sell you one and give you a loan, regardless of your credit score. But you might be shocked when you see what it’ll cost you. Car buyers who need a loan and don’t have a good credit score often end up paying more — a lot more.
Fortunately, by learning about credit scores and how they affect the interest rate on your car loan, you can take steps to make sure you always get your best deal.
What APR can you expect based on your credit score?
The higher your credit score, the better the auto loan deal you can get. That’s because if you have a proven track record of borrowing money and paying it as promised, the higher your credit score is (generally) and the lower the risk you are to lenders. These lenders might even compete with a bank or credit union for your business by offering you a lower interest rate loan.
If your payment history on previous loans is sketchier, however, you’re considered a riskier bet in the eyes of prospective lenders. They may think you could quit paying and that they would ultimately have to take steps to collect or repossess the vehicle. In return, lenders expect compensation for extra risk in the form of higher interest rates.
This chart, based on APRs for closed auto loans by credit score on the LendingTree loan platform in 2020, illustrates how your credit score can affect what you pay to finance your car:
|720 or higher||5.49%|
|Less than 560||18.36%|
The rate you get on an auto loan can also vary depending on whether you’re buying a new or used vehicle. Below, you can see data from the credit bureau Experian on average interest rates as of the first quarter of 2020. Note that your interest rate and your APR (annual percentage rate) will differ, with the APR reflecting your interest rate plus any fees the lender charges.
Average New Car Rate
Average Used Car Rate
|720 or higher||3.65%||4.29%|
|579 or lower||14.39%||20.45%|
If you have poor credit — a score of 580 or lower — your best option might be to find a cosigner with a better financial track record. Note that a cosigner is responsible for the debt if you default, so make sure the car payment is within your budget to protect your relationship with whomever you ask to cosign. For more in-depth guidance, read our article on how to get a car loan with bad credit.
Do auto lenders use the same credit score as other lenders?
There are a wide variety of credit scores to help meet different lenders’ needs. Because auto lenders place more importance on certain credit information, such as your history of making car payments, the credit score one auto lender sees may be slightly different from the score pulled by other lenders. Some of the credit score models specific to auto loan decisions include:
- FICO® Auto Score 2
- FICO® Auto Score 4
- FICO® Auto Score 5
- FICO® Auto Score 8
There shouldn’t be a huge difference between the score you may see for free from your bank or credit card issuer, but if you’re really curious to see your FICO® Auto Score, you’ll have to pay a fee of $29.95 a month (or cancel the subscription after your first month) to myFICO’s FICO® Advanced service.
What else do auto lenders look at besides my credit score?
Auto lenders look at several factors in addition to your credit history and credit score. According to the Consumer Financial Protection Bureau (CFPB), they’ll also consider how much income you have, your existing debt load, the amount of the loan you are applying for, the loan term (how long it will take you to pay it back), your down payment as a percentage of the vehicle value and the type and age of the vehicle you are purchasing.
The most important things car lenders consider when you apply for a loan, however, are your credit score and credit history. “You can even get a car loan when you are unemployed, provided you have a down payment and money in the bank,” said Nishank Khanna, chief marketing officer at Clarify Capital, a business lending firm in New York City.
What options do I have if I’m a first-time car buyer?
If you have limited or no credit history, and you haven’t taken out a car loan before, you might qualify for a first-time car buyers program. These programs can enable buyers to purchase a vehicle on a monthly payment plan. They also might decrease the APR and the amount of the down payment you have to make compared to other loan options.
For example, Ford offers a program you can apply to if you meet the following criteria:
- You haven’t had previous car credit
- There are no issues with your credit report
- Your income is $2,000 a month or more
Note that these programs will typically have an income and/or employment requirement, so you’ll likely need to demonstrate that you are either currently employed and earning above the required minimum or show a written job offer for a position you will be starting soon.
How can I increase my odds of getting a low-interest car loan?
Before you apply:
- Check your credit report and improve your credit score. According to Experian, you should check your credit report at least three to six months before making a major purchase. This allows time to dispute any mistakes you may find. You should also check your credit score — if it needs improvement, decrease your debt load by paying down any credit card debt you’re carrying and consider asking your card issuers for a credit limit increase, which could boost your credit utilization ratio.
- Reduce debt, save for a down payment and don’t apply for new credit. The fastest way to boost a credit score is by paying down debt, as you’ll improve your debt-to-income ratio. Plus, by saving up for a down payment, you’re reducing the amount that you’ll have to finance with an auto loan. Finally, you’ll want to avoid applying for new credit, such as credit cards or other loans, before you apply for an auto loan, as applications can generate hard inquiries — which ding your credit score each time.
- Know what you can afford. “Always get a car that you can realistically afford in terms of the car payments, not necessarily what you would like to have,” said Khanna. Stick to your decision, no matter how persuasive the salesperson can be. You can use an auto loan calculator, such as this one by LendingTree, to estimate what your monthly payment might look like based on the cost of the vehicle plus sales tax, your down payment, the length of time you want to finance the car and other factors.
When you apply:
- Shop around for a loan and get a preapproval. Just like you wouldn’t buy a car without shopping around first, you shouldn’t sign up for a car loan without comparison shopping. Know that as the middleman, a dealership can raise a customers’ APR and take the difference as profit. Consider applying to several lenders directly, without the dealership as a middleman, to know what rates you qualify for. If you get a good preapproval, it can help you negotiate with the dealership. Your credit score won’t be adversely affected by applying to several lenders for one type of loan any more than applying to one lender if you do all applications within a period of two weeks. All three major credit bureaus allow this time window specifically so consumers can rate shop. You can also use our parent company, LendingTree, to fill out an online form and receive up to five potential auto loan offers from lenders at once.
- Ask the dealer to beat the interest rates offered by other lenders’ preapprovals. When the dealer mentions financing, say that you already have your own and you’ll only borrow from the dealership if it can find a lower APR offer for you. Dealerships have a large network of lenders; they may be able to find a lower rate for you and still get a small commission from the lender. If they can’t, then you know that you already have your best deal.
- Find a cosigner for your loan, if necessary. If you’ve just entered the workforce, for example, you may not have a significant credit history. “You may need to have someone cosign your loan to get a decent interest rate,” said Khanna. A cosigner can be a parent, sibling or even a friend. Your cosigner will be liable for the debt if you don’t pay, so make sure you can comfortably make the payments and that you won’t put the cosigner’s finances at risk if something goes wrong.
As low as
24 To 84
LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.
Advertised rate is for new and used auto loans for an offered loan amount of $10,000 with a 36 month term.
After you sign:
- Make your payments on time. Missing payments can hurt your credit score, cost you extra money due to late fees and even lead to the lender repossessing your vehicle.
- Talk to the lender if you have any problems. If you find yourself in a situation of financial difficulty, see if the lender offers assistance, rather than missing payments.
- Keep an eye on refinance rates. If your initial auto loan interest rate is high, it might make sense down the road to refinance at a lower interest rate as your credit score improves — that is, take out a new loan and use it to pay your old one off.
What else should I know before buying a car?
Avoid dealerships that advertise “no credit check” or “buy here, pay here.” These dealerships specialize in sales to buyers with poor or no credit and make their own in-house loans.
According to the CFPB, you may not only pay high interest rates to places that specialize in buyers with poor credit, but you may pay thousands of dollars more for your car than you would elsewhere. If these are the only dealerships where you can get a loan, consider walking away.
“If your credit score is less than 500, you may be better off getting a car you can afford to buy outright with cash,” Khanna said. You can always get a nicer car when your credit improves.
While comparing car loans, remember to pay attention to the total cost of financing your car and be aware that the interest rate and the APR are different. You can expect your APR to be higher than your interest rate, because APR will include interest rate plus any fees the lender charges.
You have plenty to think about when you’re shopping for a car. You shouldn’t have to worry about your loan at the same time you’re checking out features and searching car lots. Get a head start on financing before you go shopping, and you’ll have one less thing to worry about while you test drive your next car.