The Importance of Good Credit for Car Loan Interest Rates
One of the biggest factors in how lenders determine your car loan interest rate is your credit history. This makes your credit score very important.
When you apply for a car loan, one of the things a lender will do is check your credit report, and get a copy of your credit score. Your credit report, or credit history, contains a record of the loans you have had in the past, as well as your payment history on the loans. Additionally, if you have neglected to pay a bill or two, these might appear on your credit report as well. Your credit score is a numerical representation of your credit report. Both of these items are important factors in determining the interest rate you receive.
Saving money with good credit
When you have good credit, you save money on your car loan because your interest rate will be lower. The higher your credit score, the lower your interest rate. Here is a simple example:
If you borrow $12,000 for a car at 7.5 percent interest, you will owe $900 in interest for the first year.
Interest is usually compounded for the length of the loan, since most car loans operate on a fixed interest rate, and the total amount to be repaid is determined at the time you get the financing:
Say you borrow your $12,000 at 7.5 percent interest, paying $900 in interest per year. Your loan is for 4 years, so you pay $900 a year in interest ($3,600 total interest).
But what if you have credit that is not as good? You might have to pay an interest rate of 9.5 percent. Here is how those same numbers would work out:
$12,000 x .095 = $1,140 for the first year. If you multiply that for 4 years, you end up with $4,560. That’s a difference of $960!
The above are over-simplified examples. Compound interest works a little differently, and you will likely pay more in interest that stated above. However, the difference might also be larger. And the longer the term of the loan, and the greater the difference in interest rates, the more you could save — or pay. You can save a great deal of money over the life of your car loan when you have good credit.