How Your Credit Score Affects Your Auto Loan Interest Rate

Published On:
March 14, 2022

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When you are applying for an auto loan, one of the most important things you will need to keep an eye on is the interest rate. One thing you can do to help get great interest rates is to make sure you have a good credit score.

By shopping around for the lowest rates and watching your credit score, you can save hundreds if not thousands of dollars on your financing over the lifetime of your loan. Keep reading to learn how your credit score affects your auto loan interest rate.

How Rates Are Connected to Your Credit Score

Your credit score is linked to the interest rate you can receive. The higher your credit score, the lower the rate you will lock in.

According to Experian, as of the first quarter of 2020, consumers with the best credit scores were landing prime interest rates of below 4% on new cars and an average of 4.29% on used cars.

 

Credit Score

Average New Car Rate

Average Used Car Rate

Deep subprime (579 or below) 

14.39%

20.45%

Subprime (580 - 619)

11.92%

17.74%

Nonprime (620 - 659)

7.65%

11.26%

Prime (660 - 719)

4.68%

6.04%

Super prime (720 or above) 

3.65%

4.29%

 

As you can see from the chart above, even a small difference in your credit score can make a big impact on the interest rate you receive and the monthly payment you will have to pay your lender.

How to Improve Your Credit Score

When you need to increase your credit score in a hurry, there are a few strategies you can implement to land a better interest rate. Below are some tested tricks to up your score, but you can also download our Credit Score Guide for even more helpful information.

 Pay Down Your Debts

One of the biggest factors that affect your credit score is your credit utilization. Consumers should aim for 30% credit utilization or less, which means that your balances are not more than 30% of your available credit. 

If you can, pay off as much of your existing credit card balances as you can. Doing this can increase your credit score drastically in as little as a few weeks.

Request Credit Limit Increases

Another way to improve your credit utilization ratio is by requesting a credit limit increase on all of your credit cards. While you are not guaranteed a positive response, it never hurts to try!

Dispute Inaccurate Information

In some cases, your credit score can be affected by outdated or inaccurate information. Be sure to get a free credit report check each year in order to scan through your report and correct any wrong info. 

You should be able to dispute any wrongful late or missed payments, collections, and judgments that may be on your record. Sometimes, creditors will even remove late or missed payments as a courtesy.

Avoid Applying for New Debts

When you are in the process of a major purchase like an auto loan, you'll want to avoid taking on any new debts or applying for any new credit cards. Each hard inquiry into your credit can affect your credit score, and adding new accounts can lower it even further. 

You'll also want to avoid closing any old existing accounts while you wait for your auto loan to be finalized. Closing existing accounts can also impact your credit history and credit score.

Pay Off Balances in Full

If you have a bit of time before you need to apply for your auto loan, a key way to improve your credit score is to pay off your balances in full each month. This means that whatever purchases and bills you charge to your credit card are paid off within 30 days or before you receive your next statement.

Try a Secured Credit Card

When you have new or unestablished credit, opening a secured credit card can be the perfect way to build up your credit report and improve your credit score. Secured credit cards work by holding a (refundable) deposit that you give to the lender in exchange for access to a line of credit.

Consider Debt Consolidation

If you are struggling to pay off your debts and are carrying balances on a variety of credit cards, taking out a debt consolidation loan or opening a new card and utilizing a balance transfer can be a very effective way to increase your credit score.

Your Credit Score and Auto Loan: Ready to Apply?

At Arbor Financial, our members benefit from low rates and fast approvals that save you money on your auto loan or refi. We can help you make sure your credit score and auto loan work together to get you the car of your dreams at the best price.

In addition to ensuring you get the best interest rate using the strategies above, getting pre-approved for a car loan will give you a big advantage.  Our auto loan pre-approval process is straightforward, and our team is here to help get you started.

THE BENEFITS OF GETTING PRE-APPROVED FOR AN AUTO LOAN

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