A good credit score can save you up to $10,000 when buying a car — and a bad score means you’ll have to pay that much more.
Your credit score plays a big role in how much interest you’ll pay on an auto loan — and interest rates are rising.
The average new car loan amount for 2023 was $40,366. However, the total loan amount could range from $46,419 to $57,339 depending on the interest rate. analysis According to personal finance site MarketWatch Guides.
The average used car loan is $26,685, but once you factor in interest rates, the total cost of the loan can range from $32,205 to $43,812.
Interest rates on auto loans are at their highest in years. Average Rate According to Experian, the average interest rate on a new car is 5.4% for those with the highest credit scores and 15.6% for those with the lowest. For used cars, the average interest rate ranges from 6.8% to 21.6%, depending on your credit score.
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What is a good credit score for a car loan?
It is possible for consumers with bad credit to get a car loan, but the loan will likely come with a very high interest rate, significantly increasing the total cost of the car.
“If you have a lower interest rate, you could end up paying thousands of dollars less than you would if you had a higher interest rate.” Kimberly PalmerPersonal finance expert at NerdWallet.
The wide difference in auto loan interest rates reflects complex math: If your credit score is low, auto loan companies consider you a higher risk. And cars are diminishing assets; they generally lose value with each passing year.
“Interest rates incorporate the risk that lenders take on by lending against assets that are declining in value,” Palmer said.
The good news is that cars are more plentiful now than they have been in recent years, and prices, although high, aren’t rising: The average new car is about $49,000, while the average used car is about $29,000.
And there’s more good news: The auto-lending industry is “highly competitive,” Palmer said, and lenders want customers.
Here are some tips to help you save money when buying your next car.
Choose a less popular car
Some models are popular, others are not. Look for cars that are not being bought often. Brian MoodyEditor-in-Chief of Kelley Blue Book and AutoTrader.
“ Acura ILX “It’s a discontinued model,” he says. “It’s a great car, but most people aren’t looking for an Acura ILX online.”
Less popular cars are often sold at discounted prices, so look for discontinued models, sedans, and lesser known brands.
Avoid flashy features
Luxury features like heated seats, a sunroof, a premium sound system, etc. can add significantly to the price of a car, so think about which ones you really need.
“The more stuff you have in your car, the more likely it is to break down.” Lisa GillInvestigative reporter for Consumer Reports.
Buying a car without a backup camera
Backup Camera It became the standard It’s 2018. If you’re buying an older car, you can save thousands of dollars by choosing one without cameras. And you can buy the car yourself.
“You can add a backup camera for about $800,” Moody said.
Check your credit score
Experts say many consumers walk into showrooms without knowing what their credit score is or how it might affect their purchase.
“I think the biggest mistake people make is just walking into a car dealership, whether it’s a new or used car, without knowing what their credit score is,” Gill says.
Many banks and credit card companies allow you to check your credit score for free.
FICO score 8 “FICO is a very good company, and we’re very happy to help you get your score. We …
Get pre-approved for a car loan
Experts say it’s also a mistake to go to a car dealership without being pre-approved for a loan.
“Always go to your bank or credit union first and get pre-approved,” Moody said.
With pre-approval, a lender reviews your credit history to determine how much money you can borrow and at what interest rate.
A pre-approval “is basically the lender saying, ‘Here’s what I see is your budget.’ David StraughanSenior automotive journalist at MarketWatch.
Once you get pre-approved, “you’ll be surprised at how much the dealer is willing to work with you,” Straughan says, because they know you’re ready to buy.
Find a loan
First, apply for a car loan at your own bank. If you have poor credit, consider joining a credit union.
Credit unions are chartered “almost like nonprofits,” Gill said, “and typically one of their charters is to improve the community’s ability to afford cars and homes,” meaning offering competitive interest rates.
Once you’ve secured pre-approval, “give the dealer an opportunity to offer terms that are better than what the bank has offered you,” Moody says.
Pay a larger down payment
Making a large down payment when buying a car accomplishes several good things.
First, it lowers your potential interest rate. Interest rates rise and fall depending on your loan-to-value ratio, Straughan says. The more you put down, the lower your interest rate will be.
Secondly, because you’ll be borrowing less money, your monthly payments will be lower.
Third, because you’re borrowing less money, you’ll pay less interest over the life of the loan.
Improve your credit score
If you have time before you buy a car, try to improve your credit score.
According to an analysis by MarketWatch, raising your score from 650 to 700 could help lower your interest rate on a used car from 14% to less than 10%, potentially saving you more than $3,000.
Obtain A free copy of your credit reportGill urged people to look for “errors that could lower your score,” including accounts that are incorrectly listed as delinquent or in collections, which she said are reported to the credit bureaus.
Try to pay off any high credit card balances: the less you use your available credit, the more you’ll be rewarded by credit agencies.
Gill said if you have a late payment on your credit report, ask your creditor to forgive it.
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Remember: You can always refinance
Even if you end up getting a “bad” car loan with a higher interest rate and payments, you can always refinance.
Work to improve your credit score: Experts say a higher score can increase your chances of getting a lower interest rate when you refinance.
Straughan said interest rates could fall over the next six months to a year, creating an opportunity to get a better rate.
