If you find yourself with bad credit, car loans can be hard to come by. Your credit score affects not just your ability to get a car loan but also how much it will cost you. This is pretty common knowledge.
But what are the real life effects of your credit? Let’s take a look.
Getting the Loan
The automotive marketplace has changed in recent years, and in ways that are good for people with less than perfect credit. Not everyone offers bad credit car loans (we can help you there!) but there are many more options than there used to be.
Lenders have learned that for most people, having a car is the key to having a job. People put their car payments above most other bills for that very reason. So even for bad credit borrowers, risk for car loans is smaller than previously thought. And lenders like low risk.
So if you have some dings on your credit report, the great news is that you’re not in the same boat as just a few years ago. Chances are excellent that you can get a car loan.
What Will It Cost?
In the past, this kind of information might have been hard to come by. But myFICO.com has a very cool loan savings calculator that breaks down interest rates by credit score ranges. Sure, the numbers are averaged, so you might not get exactly those rates, but they’re a great starting point for planning your next car purchase.
Let’s look at an example. If you have a credit score in the lowest range (500 – 589), you’ll pay 16.18% interest (this is a national average – the tool also allows you to get an average based on the state you live in) on a four-year used car loan. If you’re borrowing $20,000, your monthly payment will be $569, with total interest of $7,295 over the life of the loan.
Now, if you can hold off on your purchase and work on your credit score to get it in the 620 – 659 range (still considered subprime but not terrible), your interest rate changes to 10.188%. That makes your car payment $509 per month (save $60 each month!) and total interest of $4,435. That’s almost $3,000 over the life of the loan!
And of course, the savings just get better the more your credit score improves. Now, if you can’t wait until your score improves to buy a car, not all is lost: a car loan is one of the very best ways to improve your credit. So while you might pay more now, if you’re diligent about paying your bills on time, you’ll reap the rewards next time out buying a car.