How to Get the Best Auto Loan Rate With a Low Credit Score

The best rates go to those with good credit, but there are still ways to save money if your credit can be improved.

By Benjamin Preston

If you’ve ever financed the purchase of anything, whether it’s a car or a refrigerator, you know your credit score is essential to obtain a favorable interest rate. The best deals are reserved for those with the best credit, but that doesn’t mean you have to accept the worst terms if your credit isn’t that good.

A good credit score usually means you can get a lower interest rate, while a bad credit score – or having no credit because you never financed anything – can push you into the category. subprimes. For the lender, a low credit score means that you are at higher risk or, according to their statistical calculations, less likely to repay the loan. So you end up having to pay a higher interest rate, which adds significant financial costs to the purchase price of the car (or anything else) you buy.

Between a fifth and a quarter of all auto loans fall into the subprime category, according to analysts at TrueCar, a leading online auto marketplace in partnership with Consumer Reports. That’s over 5 million car loans a year.

But your credit score may not be the only factor driving up your car loan rate. If you finance through the car dealership, using a loan option they broker rather than a bank or credit union, the rate is often higher because the dealership takes a cut for acting as ‘intermediate.

Additionally, a recent study shows that car loan rates for black or Hispanic consumers may be higher due to bias and weak government oversight.

“Unfortunately, discrimination persists in both the granting of credit and the rates that some consumers pay for their loans, but knowing as much as possible as soon as possible really helps,” says Alain Nana-Sinkam, vice president of initiatives. strategies at TrueCar. . “Having a better idea of ​​what kind of rate you might qualify for will help you determine if you’re not getting the terms you should.”

Even so, experts say there are ways to keep your car loan rate as low as possible. Although Consumer Reports and other auto loan experts recommend improving your credit score before applying for a loan, real-world circumstances don’t always allow enough time to do so.

Perhaps the best way to get a lower rate is to see what your bank or credit union is offering instead of the car dealership.

“Before you go to the dealership, shop around and compare interest rates for yourself, so you know what’s available based on your credit and income,” says Chuck Bell, director of programs for the advocacy division of CR.

“Many lenders will give you a direct loan, so you don’t have to go through the dealership to get their often more expensive financing,” says Bell. “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 soft credit check, which won’t hurt your credit score.”

In general, those with excellent credit will get the best rates. People with bad credit or no credit—those who haven’t had to make payments on credit cards and other monthly bills lately—will pay the highest rates. Rates are increased on subprime loans because the borrower is more likely to default on the loan.

“Your score is designed to be a predictor of your risk of repaying what you borrow,” says Nana-Sinkam. “It looks at your history of paying bills, credit cards, car, home and personal loans on time, and uses this information to predict your future behavior and therefore your risk.”

A low credit score means you won’t usually qualify for the eye-catching zero percent offers highlighted in new car ads, and that means you could be paying hundreds or even thousands of dollars more in interest for a while. the term of the loan.

According Experianone of the major credit rating agencies, credit ratings are broken down as follows:

Perfect, 800-850: This category includes 21% of borrowers and benefits from the best rates.

All right, 740-799: A quarter of borrowers fall into this category, which promises interest rates above the average lender.

Alright, 670-739: This segment covers 21% of borrowers, and Experian says only 8% of the group is likely to become seriously in arrears.

Just, 580-669: This category is considered subprime and comprises 17% of borrowers.

Poor, 300-579: Only 16% of borrowers are in the deep subprime category, which brings the likelihood of additional fees, deposits or loan application rejections.

“The sad reality is that if you’re a subprime buyer, you’re going to pay more interest than someone with a good credit rating,” says Matt DeLorenzo, editor at Kelley Blue Book.

How to save money

In conversations with experts in the lending industry, CR discovered that there are several ways to save money, even if you have a suboptimal credit score.

Know your credit score. Experian recommends checking your credit score at least once a year. This way, you’ll know where you stand so you can manage expectations around loan eligibility and know what you need to do to increase your score. You should also check for errors in your credit report, which can affect your score, Bell says.

“Fortunately there is no shortage of websites you can visit online to get a free credit score,” says Nana-Sinkam. “All major credit bureaus offer one free credit report per year.

If there is time left, improve your score. A credit rating can be improved in many ways, primarily by paying bills on time. Always pay your credit cards and other bills when they are due, even if it is only the minimum payment. This is good advice for any loan: the more you pay up front, the less you will pay in the long run.

Bring a bigger down payment. “Having a larger down payment reduces the amount of loan you need, and a smaller loan means less interest,” says Amy Wang, associate director of Credit Karma Auto. “A down payment can be in the form of cash, an exchange vehicle, or a combination of both.”

Get prequalified. Much like knowing your credit score, being prequalified for a loan with your bank helps manage expectations of what’s possible.

Talk to your financial institution and see what’s available. Nana-Sinkam says that before you get prequalified, it’s a good idea to review your credit report to see if there are any questionable items. Every little bit counts, and a few corrections are enough to get a better rate. Getting approved for a loan before you go buy a car gives you yet another bargaining chip.

“Have a rate you can present to the dealer to see if they can beat it,” DeLorenzo says. “Dealers may have access to programs that may offer better rates to subprime borrowers.”

See what the dealer manufacturer offers. If you’re looking for a new vehicle, manufacturers such as Chrysler, Hyundai and Kia often have programs for subprime borrowers, DeLorenzo says. You have to dig around on their websites to see what’s out there and keep in mind that this type of offer will be found on cheaper cars.

“Most of the subprime loans you’ll see are for entry-level and economy cars — the bottom end of the product line,” he says. “I don’t think any manufacturer wants to entice a subprime buyer into a high-margin vehicle like a luxury car or a pickup truck.”

Consider buying a used vehicle. In general, used cars cost less and the value of a used car is more likely to stay stable longer than a new car, which will depreciate quickly. This means that used car transactions pose less risk to the lender and a subprime borrower is more likely to be approved for a loan.

“In our experience, most subprime buyers buy from the used car market because they’re looking for vehicles at a lower price,” Wang said.

Report suspected discrimination. Racial discrimination in auto lending is nothing new. Ally Financial, which handles loans for several automakers, has settled a lawsuit for discrimination for $80 million just a few years ago.

An academic report released in December 2019 found that black and Hispanic borrowers were 1.5% less likely to be approved for a loan and paid 0.7% higher interest rates, regardless of their credit. The study found that although bank lending — which is federally regulated — was much less likely to be discriminatory, more than 80,000 black and Hispanic borrowers were denied loans they would have been approved for if they had been white.

Loans offered by dealers are called indirect loans because the dealer arranges the financing through a third-party company. But the dealer does not have to share with the borrower the loan offers that come from the lender. This is how they mark up loans for profit and, as shown in last year’s study, how dealers were able to charge minority borrowers more. A federal rule enacted in 2013 brought auto loans under the control of the Consumer Financial Protection Bureau (CFPB) and reduced discriminatory auto loans by 60%. But the rule was overturned by Congress months before the 2018 midterm elections.

“Unlike mortgage lenders, who report every application through the Home Mortgage Disclosure Act, auto lenders do not routinely report application or loan data, making it difficult for regulators to monitor discriminatory lender practices. “says Erik Mayer, one of the study’s authors. “We find the strongest evidence of discrimination in the Deep South, the Ohio River Valley and parts of the Southwest. Our estimates of auto loan discrimination correlate strongly with state-level measures of the prevalence of racial bias.

If you suspect discriminatory lending, Mayer suggests filing a complaint with the CFPB or the Federal Trade Commission.

More from Consumer Reports:
Best tires for 2016
Best Used Cars Under $25,000
7 Best Mattresses for Couples

Consumer Reports is an independent, nonprofit organization that works alongside consumers to create a fairer, safer and healthier world. CR does not endorse products or services and does not accept advertising. Copyright © 2022, Consumer Reports, Inc.

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