Summary
- If you want to finance the purchase of buying a new or used car, your credit score will have a big impact on the rate you get.
- You can consider refinancing your current car payment to potentially save money right now and in the long run.
- Check out these tips on how to improve your credit score before purchasing a car.
In the market for a new car? You’ve probably seen countless commercials for 0% financing or cash back deals on a new SUV or Sedan. Dealerships are likely trying to catch up on sales after being closed for months due to COVID-19, and with 2021 inventory coming in, some want to get rid of 2020 models as soon as they can (it’s probably safe to say that almost everyone wants to get rid of anything 2020-related at this point!). These deals, combined with generally lower interest rates, likely make a great case for you to buy a new car if you’re looking for one. But is now the right time?
Your credit score plays a huge role
If you want to finance a new or used car, it’s important to pay close attention to your credit score because it can have a big impact on the rate you receive. Understanding the different rates at different credit score levels can help you make sound decisions when purchasing a car. Perhaps you’ll decide that you want to wait until your credit score improves before applying for a loan. Or, maybe you need a car now and you don’t qualify for an auto loan — knowing this will help you understand that you may need to find a cosigner for your loan. The bottom line is simple: knowledge is power, and understanding the credit score requirements for an auto loan can help you make better decisions, saving yourself a significant amount of money in the process.
Consider refinancing to save money on your current car payment
You might be able improve your cash flow and save money in the long run by refinancing your car loan at a lower rate, a longer term, or both. For example, our auto refinance partner, Caribou, is currently offering rates as low as 1.99% to qualified consumers, which could help save on average about $100 a month on a car payments.
Again, it’s important to make sure your credit score is in top shape if you’d like to explore refinancing. Read below to learn about the impact a few points on your credit score can make.
Auto loan rates by credit score band
The data below was collected by U.S. News and shows the average interest rates broken down by credit score and for new car loans vs used car loans. As you can see by the difference in loan rate for a person with a credit score of 750+ and the loan rate of a person with a score of 451-599, the loan rate is almost doubled. To imagine how much of a difference that is in cash, let’s imagine you take out a loan of $28,800 to buy a car. If you had a 750+ credit score and had a loan rate of 4.88% you’d be paying $3,691 in interest payments. But if you had a credit score of 451-599 with a loan rate of 10.99%, the total in interest payments comes to $8,762. That’s almost $5,000 more you’d have to pay than someone with a 750+ credit score.
How to improve your credit score before purchasing a car or refinancing
If you’re not happy with your credit score and the position it puts you in when financing a car, here are some quick steps you can take to improve your score:
- Make all of your payments on time. Your payment history is the single biggest contributing factor to your credit score. Always strive to make all of your payments on time to be well on your way towards a good credit score.
- Lower your credit utilization. One of the fastest ways to see a large impact on your credit score is to lower your credit utilization. Pay off or pay down any balances that you can. If you are unable to do this, requesting an increase in your credit lines can also have the same effect as long as you use your credit responsibly.
- Ask a family member to add you as an authorized user. Piggybacking off someone with a well-established and good credit history can also go a long way towards improving your own credit. As an authorized user on their account, you are essentially “borrowing” their good credit history to improve your own.
Monitoring and improving your credit score is an important way to help yourself save money over time. Becoming a Credit Sesame member is 100% free and will allow you to monitor your credit score daily.
