How Credit Scores Affect Auto Loan Applications

Approximately 80% of those surveyed in a study conducted by VantageScore Solutions and the Consumer Federation of America underestimated the impact a low score has on an auto loan.That way too high considering how obvious it should be that credit scores influence auto loan decisions and rates.

Do you know your credit and auto score?  Click here to see your updated credit report and scores.

A credit score predicts credit risk and the higher the score, the lower the risk to the lender.  The interest rate reflects the risk posed by the borrow.  Those individuals with high credit scores are considered of lower risk and pay the lowest interest rates.  As you may have guessed, it works the opposite way for those with low scores.  They are of higher risk, so they pay higher interest rates.

Car sales have increased since 2009.  It could be a combination of having more confidence in the economy and/or that their car is falling apart.  Whatever the reason, the demand for cars is up.

High score results in lower interest

The following examples are based upon a car loan for $25,000 for 60 months and using three different credit scores. The three scores used were one hundred points apart – 750, 650 and 550 – and were based upon a score which ranged from 300 to 850. The interest rate and interest paid over the life of the loans will be compared.  The interest rate information is for illustration purposes only using the myFICO.com site.  The interest rates could be higher or lower, depending upon when you apply for the loan.

In this example, a person with a score of 750 would be charged an interest rate of 3.46%, pay monthly payments of $454, and pay $2,251 in interest over the life of the loan.  Someone with a score of 650 would be charged an interest rate of 10.89%, pay monthly payments of $642, and pay $7,533 in interest.  The person with the 650 score pays $4,872 more in interest than the person with the 750 score.

Scores below 640 are consider below prime, but some auto loan companies will lend to individuals with lower scores, but at much higher interest rates.  Using the same example as above, a person with a score of 550 would be charged an interest rate of 17.32%, pay monthly payments of $626, and pay $12,541 in interest.  This person would pay $5,008 more in interest than the person with a score of 650 and $9,880 more than the person with a 750 score.  I don’t know about you, but this is a substantial difference.

Before you buy a car, you may want to check your credit report and credit score. This will help you gauge the interest rate for which you will qualify.  If you have poor credit, you may want to delay your purchase and work on improving your credit.  The best way to do so is to pay your bills in full and on time and avoid taking on new debt.

Do you know your credit and auto score?  Click here to see your updated credit report and scores.

Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, founder of www.creditexpertwitness.com and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  You can follow John on Twitter here.