What is the Deal with Bad Credit and Auto Loan Rates?
A bad credit score cannot keep you from getting a car. However, if you follow tips such as improving your credit score, choosing a short-term loan and buying a used car, you can surely obtain lower interest rates than before. Understand the link between bad credit score and interest rates to save some dollars on the deal.
The interest rate for bad credit car buyers will always be higher than a good credit individual. The primary reason being that a lender is taking a risk by lending money to someone who has difficulty in repaying the money or maintaining a healthy credit score. Before you step into a dealership to check out car models, you should check your credit score. It is the key element in deciding the amount of interest rate that you will have to pay for your car. Bad credit buyers should think one step ahead and ascertain the average interest rate according to their credit score in order to avoid any surprises later.
Bad Credit Score and Auto Loan Rates: How Bad is Really Bad?
Any credit score above 620 is considered to be decent and will attract reasonable interest rates. However, for people who have a credit score of 620 or lower, the credit score is considered to be poor. According to nerdwallet.com, a subprime credit score, which ranges from 501 to 600, will give you an interest rate of 16.14% for a used car and 11.89% for a new car.
While a deep subprime credit score of 300-500 gives you an interest rate of 19.98% for a used car and 14.41% for a new car. For credit challenged people, it is ideal that you build your credit score and bring it close to 601-660 so that you can achieve a lower interest rate on the purchase of your car.
Bad Credit Auto Financing Tips that Will Save You Dollars!
1. Check & Improve your Score
Before you start thinking about the details of your car, it is wise to check your credit score. Knowledge about your credit score will give you an estimated idea about the interest rate. If you have time before you apply for your auto loan, always take actions that will boost your score and help you to negotiate lower interest rates. Display a strong payment history by clearing your debt. Pay off credit card balances and keep them low. You should also avoid taking any new credit until the auto loan is approved.
2. Short Loan Term is Favorable
If you have suffered from bad credit history, do not go for a long-term auto loan. A term of 72 months or more will force you to shell out more money in the long run. It is because you will have to pay a higher amount towards the interest. Alternatively, choose a shorter term to reduce your financial charges significantly. An ideal term period is close to 60 months. However, bad credit auto buyers can even go for 48 month or 36 months to get a competitive interest rate.
3. The New Vs. Used Debate
The difference between a new car and a used car can be felt in the pricing as well as the auto financing rates. One may argue that new car loans come with lower interest rates and so it is wise to choose a brand-new model. However, the high cost of new cars can cause trouble. Individuals with bad credit should opt for used cars as the pricing is affordable and approvals are easy to obtain on pre-owned cars. Bad credit will hike up your interest rates than normal. Choose to go for a new car only if you are ready to make significant down payment.
Improve Credit Score to Decrease Auto Loan Rates
While an interest rate is decided on multiple factors such as the amount of the auto loan, term period and down payment, the most important factor is your credit score. Always make an effort to keep a consistently good credit score. Once you improve your credit score, your interest rates will automatically decrease and you can move forward to purchase your favorite car.