How to Get the Best Car-Loan Rate Despite a Low Credit Score
A good credit score can get you a lower interest rate, while a poor credit score-or having no credit-can push you into the subprime category
The best rates go to those with good credit, but there are still ways to save money if your credit has room for improvement
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If you’ve ever financed the purchase of a car or a refrigerator, you know your credit score is important to getting a good deal.
This indicates a higher risk to the lender, so you have to pay more, adding significant finance costs on top of the purchase price.
But your credit rating may not be the only factor driving up the rate on your car loan. If you finance through the car dealer, using a lending option that they broker rather than a bank or credit union, the rate is often higher because the dealership takes a cut for acting as the middleman.
Anywhere from a fifth to a quarter of all car loans fall in the subprime category, according to analysts at TrueCar, a major online automotive marketplace that is partnered with Consumer Reports
Further, a recent study shows that car-loan rates for Black or Hispanic consumers can be higher because of bias and weak government oversight.
“Sadly, there remains discrimination in both the granting of credit and rates some consumers pay for their loans, but knowing as much as you can as soon as you can really helps,” says Alain Nana-Sinkam, vice president of strategic initiatives at TrueCar. “Having a better idea of what sort of rates you might qualify for will help you identify if you are not getting the terms you should.”
Even so, experts say there are ways to keep the rate on your car loan as low as possible. Although Consumer Reports and other auto-loan experts recommend improving your credit rating before applying for a loan, real-life circumstances don’t always allow enough time to do that.
Perhaps the best way to get a lower rate is to see what your bank or credit union is offering instead of the car dealer.
“Before you go to the dealership, shop around and compare interest rates for yourself, so you know what’s available based on your credit and income,” says Chuck Bell, programs director for CR’s advocacy division.
“Many lenders will give you a direct loan, so you don’t have to work through the dealership to get their often higher-priced financing,” Bell says. “You can apply for loans to banks or credit unions, and some lenders will prequalify you for the amount you are seeking with a soft credit check, which won’t hurt your credit score.”
In general, those with excellent credit will get the best rates. People with poor credit ratings or no credit-those who haven’t had to make payments on credit cards and other monthly bills lately-will pay the highest rates. Rates are marked up on subprime loans because the borrower is more likely to default on the loan.
“Your score is designed to be a predictor of your risk of paying back what you borrow,” says Nana-Sinkam. “It looks at your history of paying bills, credit cards, auto, home, and personal loans on time, and uses that information to predict your future behavior and therefore your risk.”
A low credit score means you typically won’t qualify for the catchy zero percent offers highlighted in ads for new cars, and it means that you could pay hundreds or even thousands of dollars more in interest over the life of the loan.