If you’ve ever financed the purchase of a car or refrigerator, you know that your credit score is getting a smart deal.
A credit score can lower the interest rate, while a bad credit score, or no credits, pushes you into the high-risk category. This indicates a greater threat to the lender, so you must pay more, adding significant monetary prices in addition to the purchase price.
According to analysts at trueCar, a primary automotive market related to Consumer Reports, between one-fifth and a quarter of all auto loans fall into the high-risk category. That’s more than five million car loans a year.
But your credit score may not be the only thing increasing your car loan rate. If you finance through auto intermediation, using a loan option that you trade instead of a bank or a credit union, the rate is higher because the broker takes a reduction to act as an intermediary.
In addition, a recent review shows that auto credit rates for black or Hispanic consumers may be higher due to bias and low government oversight.
But there are tactics to keep your car loan rate as low as possible. While Consumer Reports and other auto loan experts propose to improve your credit score before applying for a loan, real cases don’t leave enough time to do so.
Perhaps the most productive way to get a rate of decline is to see what your bank or credit union gives the car dealership.
“Before moving on to the dealership, compare and compare interest rates for you so you know what’s been based on your credits and income,” says Chuck Bell, program manager for VC’s defense division.
“Many lenders give you a direct loan, so you don’t have to go through the dealership to get your most expensive financing,” Bell says. “You can apply for loans from banks or credit unions, and some lenders will prequalify you for the amount you’re looking for with a flexible credit check, which will have no effect on your credit score.”
In general, those with the right credits will get the most productive rates. People with poor credit ratings or those who don’t have credit, those who haven’t had to make credit card bills and other monthly expenses in recent times, will pay the highest rates. Rates are higher on high-risk loans because the borrower is more likely to fail to meet the loan.
“Your score is designed to be an expectation or your threat to pay what you borrow,” says Alain Nana-Sinkam, Vice President of Strategic Projects at TrueCar. “Review your payment history for bills, credit cards, auto loans, genuine and non-public goods on time, and use this data to wait for your long-term habit and threats.”
A low credit score means you won’t be eligible for attractive 0% donations highlighted in new car classified ads, and that means you can pay for classified ads or even thousands of dollars in additional interest over the life of the loan.
According to Experian, one of the main reporting agencies, the ratings are as follows:
Excellent: 800-850 This category includes 21% of borrowers and gets the rates.
Very good: 740-799. A quarter of borrowers fall into this category, which promises higher interest rates than the average lender.
Well: 670-739. This segment covers 21% of borrowers, and Experian says that only 8% of the organization is likely to be in arrears on payment.
Fair: 580-669 This category is considered subprime, and comprises 17 percent of borrowers.
Poor: 300-579 Only 16 percent of borrowers are in the deep subprime category, which carries the likelihood of extra fees, deposits or loan application rejections.
“The sad reality is that if you’re a subprime buyer, you’ll pay more interest than with a smart credit rating,” says Matt DeLorenzo, publisher of Kelley Blue Book.
In conversations with experts in the lending industry, CR discovered that there are several money-saving tactics, even if your credit score isn’t optimal.
Be prequalified. Just like knowing your credit score, prequalifying for a loan with your bank helps you manage expectations about what’s possible.
Report suspected discrimination. Racial discrimination in auto loans is new. Ally Financial, which lends to several automakers, filed a $80 million discrimination lawsuit just a few years ago.
If you suspect discriminatory loans, Mayer suggests filing an application with the CFPB or the Federal Trade Commission.
My reporting has taken me everywhere from Baghdad, Iraq, to the Detroit auto show, along the U.S.-Mexico border and everywhere in between. If my travels have taught me anything, it’s that stuff—consumer products—is at the center of daily life all over the world. That’s why I’m so jazzed to be shining light on what works, what doesn’t, and how people can enrich their lives by being smarter consumers. When I’m not reporting, I can usually be found at home with my family, at the beach surfing, or in my driveway, wrenching on my hot rod ’74 Olds sedan.