Credit Scores and Car Loans: Four Tips to Getting a Low Interest Rate

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When applying for an auto loan, your credit score is key. Just like boxers obsess over their weight before the weigh-in ceremony, so too should you prepare as much as you can before shopping for auto loans. Keep the following tips in mind as you get your credit report squared away:

1. A “Good” Credit Rating is No Guarantee

Do enough research and you’ll find a plethora of credit score breakdowns indicating which ranges are considered “poor,” “fair,” “good” or “excellent.” Ignore these. The only thing that matters is your credit score. Terms such as “good” or “excellent” are purely subjective and vary from lender-to-lender and according to the state of the economy. For example, once upon a time, any credit score above 700 was considered an all access pass to zero percent auto loan financing. But after the credit crunch hit this past decade, auto lenders are being a bit more selective, bumping that bar up to about 720 or 740. Don’t burden yourself with concerns over whether you’re good, better or best—just try to get your score as high as possible.

2. Credit Reporting Agencies Make Mistakes

For whatever reason, many Americans have a phobia of checking their credit report—perhaps because they’re afraid of what they might find. But given how much getting your credit report costs (it’s free, once a year) in relation to how much you can save, it’s definitely worth reviewing your credit report before you begin shopping for auto loans.
Why? Because credit reporting agencies make mistakes. And can you blame them? They’re keeping track of hundreds of millions of consumers and a few clerical errors or oversights are bound to slip through the cracks. These can be costly. Outdated information, resolved billing disputes that haven’t been updated and incorrect credit limits or balances can end up docking your credit score significantly.

3. Every Little Bit Counts

Fixing errors on your credit report matters because an additional 50 points on your credit score could translate into several percentage points off of your auto loan interest rate. Adding just a few points to your credit score before getting an auto loan could save you thousands of dollars in the long run.
For example, a $20,000 five-year auto loan at 3.9 percent would cost you $2,045 in total interest. Meanwhile, that same loan with a 7.9 percent auto loan would end up costing you $4,274 in total interest and have a higher monthly payment.

4. Not All Lenders are Created Equally

Auto lenders typically work within a niche, and visiting the wrong type of auto lender may cost you. For example, lenders that specialize in subprime lending won’t have the resources nor the motivation to cut you deal if you have a credit score over 700. Furthermore, different lending institutions often have different rates. Don’t begin and end your search at the dealer—check with credit unions, banks and online lenders.

When it comes to the overall cost of your auto loan, the interest rate for which you can qualify plays a pivotal role. And that interest rate is directly tied to your credit score at the time that you apply. Make sure that your credit score is the best it can be before you begin shopping for auto loans.