If you’re shopping for a car, you’ve got plenty to consider. New or used? Leather or cloth seats? If you plan to finance that new purchase, though, you’ve got one more thing to ask yourself: Do I need to worry about my credit score before I buy this vehicle?
Depending on whether you plan to finance your next vehicle, the answer is likely Yes. Your credit score will impact whether you’re even approved for a new auto loan as well as the interest rate you’re offered. A difference of even 1% APR can translate to thousands of extra dollars over the life of your loan.
So, what should your credit score be when shopping around for a new (or new-to-you) car, and how can you quickly improve it? Why It Makes a Difference: There are plenty of good reasons to finance an auto loan. Even if you don’t have perfect credit, the interest rate you’ll receive is usually pretty low – somewhere around 3-5%. If you either don’t have the cash on-hand to pay for your vehicle in full or you can make more off of that money by investing it, an auto loan makes sense.
The better your credit, though, the better your loan offer will be. More specifically, the better your interest rate will be for the financing term you desire.
For example, pretend that I want to finance a $25,000 vehicle that I’m buying brand new. Let’s say that my current credit score is 710, and I would prefer 60 months of payments. My bank offers me an interest rate of 4.25%, which is pretty reasonable. Over the total life of the loan, I’ll pay $2,794 in interest charges.
Now, let’s pretend that my credit score is 790 and my bank offers me an APR of 3.1% instead. This seems like a miniscule difference – only 1.15% less – but it will save me some real cash. Over the life of the loan, I’ll only pay $2,020 in interest. Plus my monthly payments would drop from $463 to $450, giving me even more wiggle room.
The better the interest, the better the rate. The better the rate, the less you’ll spend on your car. The math is easy.
Get Better Rates Today:
What if you want, or need, to buy a vehicle today and you simply don’t have time to wait for a better credit score? Are there ways to snag a better interest rate?
While you still aren’t going to be offered the most enviable financing options, you can shop around for a lower price. The first place to check should be your credit union.
Credit unions are not-for-profit institutions. This usually translates to better customer service, more affordable financial products, higher rates on savings accounts, and lower rates on loans. If you’re a member of a credit union – or can become a member quickly – this is an excellent place to look for auto loans.
I’m a member of USAA, and always finance my vehicles through them. Right now, for instance, they’re offering me rates as low as 2.17% for a new car; I’m not shopping around, but if I were, they’d be the first place I would look.
If you’re a member of a local bank, you can also walk in and try your luck there. You can often get better rates by applying for financing in person, rather than going through the process online.
Lastly, get a few financing quotes online. It could even be worth the hard inquiry to get a pre-approval before you go in to the auto lot (after all, most score formulas will count all related inquiries as one, assuming they’re within a short period of time – usually 14 days). The manufacturer wants you to finance through them, so they are often willing to beat any other offers you may have and get you a lower APR.
Improving Your Score:
If you have a little bit of time, work on raising your score. Even 30-40 points can translate to a lower APR and, in turn, less money spent on interest over the loan.
There are many ways to improve your credit score, but start by paying down existing balances on credit cards where you can. Don’t apply for any new credit products (outside of your auto loan) to avoid the dip caused by hard inquiries. Check your credit report for errors and, if any are found, file a dispute with the bureau directly.
If you have old, negative reports on your credit, it could be worthwhile to write a goodwill letter. This request, directed to the lender, essentially asks them to remove impactful notations (such as a late payment) from your credit report. If granted, the impacts could be substantial.
Getting 0% Interest:
As you’re reading this and look at your options, you may be wondering, “What about that 0% interest offer I heard about on the radio? Why can’t I just get that?” Well, those are great financing options – if you can qualify – but are most often a hook to get you onto the lot.
Those 0% APR promotions are offered by the manufacturer directly, and come and go throughout the year. There are a few caveats to them, as well; for instance, you’re likely to get denied unless you have excellent credit (800+). You are usually limited in term length, too, and it’s rare to get 0% for more than 36 months. If you can’t afford to pay off your vehicle that quickly, you’ll be out of luck.
Auto loans are notoriously pretty reasonable, especially when compared to the interest rates offered by credit cards, personal loans, and even student loans. This doesn’t mean that you shouldn’t still try to get the lowest rate possible, though, to save yourself even more money. Of course, this means having the best credit score that you can.
If you have time to boost your score before car shopping, definitely make the effort to do so. Otherwise, you can still snag the best rate possible by looking in the right places.