How Does My Credit Score Affect the Amount of My Car Payment?

The short answer is the higher your credit score, the lower your car payment. Although other factors can impact the amount of your car payment, your credit score is one of the key measures lenders rely on to determine if you are a reliable borrower. A lower score indicates you may have had trouble repaying debt in the past or that you rely too heavily on debt as measured by the following factors that comprise your score:

Payment history – 35%

Credit utilization – 30%

Length of credit history – 15%

New credit – 10%

Mix of credit – 10%

As you can see, your payment history, which is your record of on-time payments, and your credit utilization, which is how much you are borrowing in relation to your credit limit, make up the largest portion of your credit score. If you have missed payments or are using too much of your available credit, it will hurt your credit score, which can range between 350 and 850. Although it won’t necessarily preclude you from qualifying for an auto loan, you can expect to pay a higher rate of interest. Credit scores between 679 to 550 and below are considered subprime. The average annual percentage rate (APR) on a subprime loan for a new car loan is 13% and 18% for a used car.

At the other end of the spectrum, a credit score of 720 or better can qualify you for the very lowest rates, which average 4% for a new car loan and 6 % for a used car loan. Borrowers with excellent credit – 770 or above – can qualify for 0% financing when offered by a car dealer.

Other Factors Impact Your Car Payment

While your credit score is a significant factor in determining the amount of your car payment, other factors can also have an impact. The length of the loan term can also impact your car payment. For example, given a loan amount of $20,000 and an APR of 5%, the payment on a three-year loan would be about $600 a month. If you extended the loan term to 48 months, the payment would drop to about $460. However, for loan terms of 48 months or more, the lender charges a higher rate because of the higher risk of a longer-term loan. As a rule, if you must extend your loan term beyond 48 months, chances are you are buying more car than you can afford.

You can also lower your monthly payment by making a larger down payment. It is always recommended that you make as large a down payment as possible – at least 10% up to 20%. By reducing the loan amount, you reduce the monthly payment. In addition, lenders might be more willing to offer a lower rate when you put up more of your own money.

While a low credit score doesn’t preclude you from qualifying for a car loan, it would be essential to take steps to improve it as much as possible before taking out a loan. Improving your score by 50 points can save you hundreds or thousands of dollars in interest costs over the loan term. It may take time but, while you are working on your score, you can also be saving for a larger down payment.