How Credit Scores Affect Car Loan Rates and Your Monthly Car Payment
Your credit score is the number one factor in determining your car loan interest rate and how much you'll pay every month. Find out what you can do to lower your payments and increase your credit score.
A low credit score of between 400 and 480 usually results in a car loan rate of around 14 percent. On a $15,000 car your car payment will be around $330, with approximately $160 worth of principal being paid off with each monthly payment. The rest is interest due on the loan. After a year, your new loan balance will be (12 x $160 - $15,000) about $13,080.
If the car does not depreciate in value by that much, you have made a wise investment. Of course, the next year you will reduce the loan balance by much more, since more money is going to the principal, and not interest.
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A high credit score of 650 or more will result in a car loan rate of about 6 or 7 percent. That means you are looking at a monthly car payment of around $300 on a $15,000 loan. loan is considered less of a risk, therefore less interest is needed in order to cover the risk of lending out this money. With a 7 percent interest rate you can expect to pay down about $190 on the principal of a $15,000 loan. That means after a year your new principal balance will be $12,720.
To improve your score you should pay off credit cards and bad debt, then clear up any lingering collection accounts. Then continue to make manageable payments every month of the credit cards that remain. This history of timely payments, plus a lower debt to income ratio is the most influential factor in determining your credit score and getting a lower car loan rate.
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