Thinking of getting a new or new-to-you auto? Great! But before you start shopping around, be sure you understand how much you can afford—and what your loan payments will be. Practically all of us need an auto loan in order to fund that dream car or truck—so let’s unravel how your loan rate is determined so that you can secure the best (lowest) rate possible.
The Number #1 most important consideration when you are applying for an auto loan is your credit score. Did you know that? Here’s why. When you take out an auto loan, the lender is basically saying “I trust this person to make payments on time.” In order for them to do that with confidence, they want to see evidence of your credit-worthiness—and they do that by checking your credit score. The higher the score, the better you are at paying loans, utility bills, and even your rent or mortgage. Unless you are just starting out paying for life’s bills, you already have a well-documented credit history—even if you have never checked out your score with the various credit agencies, or applied for a loan previously.
So let’s back up a bit. You want your credit score to be as high as possible in order for a lender to give you the best possible (or lowest) auto loan rate. Things that affect your rate are: on-time payment history, the number of open credit lines you have, the age of your credit history, and any negative marks on your history.
It is a good idea to find out your credit history so that you have a general idea what will be reported to a lender. You can check with any or all of the three big credit-reporting agencies—Experian, Equifax, and TransUnion—you are entitled to a free credit report at least once per year (however the score will cost you a fee.) The easiest way to get your free credit reports is through Annual Credit Report. You can also monitor your credit through any of the free credit monitoring apps available, including Mint, Credit Sesame, or Credit Karma. The actual credit score that each agency calculates is a reflection of your past and present borrowing behavior and each agency will give you a three-digit score. Scores generally fall between 300 and 850. Your score may be a little different at each agency due to their own specific algorithm. However it is a good idea to check the credit reports for inaccuracies. It is wise to challenge errors, which may be lowering your score.
The score you receive then translates to your standing amongst lenders. Lenders usually categorize the scores into something like the following designations: Excellent, Good, Fair, Poor, and Bad. Each category then has its own interest rate for an auto loan. So the goal is to get yourself into a better designation to then capture a lower auto loan rate.
Of course good credit matters, but people with less-than-ideal credit scores can still get an auto loan—they just need to understand they won’t be eligible for the lowest loan rates. They also may only be approved for a lower loan-to-value amount, so a significant down payment may be required. And a steady income certain will help grease the wheels for loan approval as well. (Another option for State ECU members is to first open a secured loan and get an on-time payment history rolling—and build a credit history that will then help score a good auto loan payment.)
Here’s an example to see how different credit scores (and thus auto loan rates) will affect your payments. Let’s pretend you are applying for an auto loan on a used car that costs $10,000. (Keep in mind, used car rates are across the board higher than new car rates.)
According to Nerdwallet, an online personal finance resource, individuals with pretty good credit (661-780) scores may find a three-year auto loan around 4.5% with a monthly payment of $297.47. However, if that individual’s credit score dropped into the category of 601-660, they may find a three-year auto loan increases to around 10% and monthly payments equal $322.67. A further drop in credit score, say to 501-600 could increase the three-year auto loan to around 15%, with a monthly payment of $346.65. So you can see just how important it is to have the highest credit score possible.
Improving your credit score should be a goal prior to securing an auto loan. Here are a few ways to do so:
- Sign up for auto payments from your State ECU checking account to ensure timely bill payments.
- Don’t max out your credit cards, and try to keep your balance no higher than 20% of the card’s limit.
- Do not close or open credit cards in the time leading up to applying for an auto loan.
Want to learn more about car loans, how to refinance an auto loan, and best car shopping tips? Set up a one-on-one consultation with our State ECU Member Representatives who would be happy to answer your questions and concerns. In addition, now is the perfect time to get an auto loan (or refinance one from another institution) with State ECU’s Diamond 60th Anniversary Summer Auto Loans program. With this terrific offer, you not only lock in a great, low auto loan rate but you also receive financial benefits that will make this summer even more enjoyable—including 90 days no payment and $160 cash back reward.