Your credit score is one of the most important variables that lenders use to assess your risk. A low credit score can disqualify you for an auto loan, or force you to pay higher interest rates – but how much will higher interest rates cost you in the long run? New data from Experian shows just how much a poor credit score can cost you over time.
As of the second quarter of 2018, Experian shows a 5.76% average interest rate for new car loans – not far above the 4.45% average rate for prime borrowers with credit scores between 661 and 780, or the 3.47% average rate of super-prime borrowers with credit scores above 781. Non-prime borrowers with credit scores between 601 and 660 are charged an average 7.55% interest rate for new car loans.
However, the penalty for lower credit scores is significant. Subprime borrowers (501-600 credit score) pay 12.14% interest on average, and deep subprime borrowers (300-500 credit score) pay a whopping 14.93% on average for their auto loans.
Used car loans show a greater discrepancy. The average used car loan interest rate is 9.4%. Average rates for different groups are 4.19% for super prime, 5.94% for prime, 10.63% for non-prime, 16.72% for subprime, and a painful 19.51% for deep subprime.
With auto prices rising, the consequences of poor credit can be severe. Data from Experian Automotive shows the average loan for a new car hit $30,958 in the second quarter of 2018, while the average used car loan reached $19,708 – a record high for used car loans. Average monthly payments hit $525 for new cars and $378 for used cars.
Credit score effects are compounded by the increasing length of auto loan terms. The average car loan term in the mid-1980s was 46 to 52 months, compared to today's average of approximately 69 months for new cars and 64 months for used cars. Longer terms mean more affordable monthly payments, but more money spent over the long run.
Consider a $19,708 average used car loan with the average 9.4% interest rate. For a 48-month loan, your average auto payment would be $494.19, or $23,720.89 in total payments. A 72-month loan equals a $359.17 monthly payment ($25,860.51 total), while an 84-month loan provides a $321.10 monthly payment ($26,972.32 total).
Super prime borrowers would only pay $446.67 per month ($21,439.90 total) for a 48-month loan – saving $2,281, or over 11% of the list price.
If you're a subprime buyer trying to buy the same car, you're paying $435.35 monthly ($31,345.57 total) for a 72-month term and $399.57 monthly ($33,563.30 total) for an 84-month term. Even an 84-month term will have you making above-average monthly payments. A 48-month loan is probably out of your monthly payment range at $565.82 monthly ($27,159.70 total).
Deep subprime borrowers face payments of $466.48 monthly ($33,586.67 total) for a 72-month term and $431.84 monthly ($36,275.24 total) for an 84-month term.
For the same $19,708 car, a subprime borrower will pay an average $5,485.06 extra for a 72-month loan and $6,590.98 for an 84-month loan. A deep subprime borrower will pay an average $7,726.16 extra for a 72-month loan and $9,302.92 for an 84-month loan – over 47% of the list price.
Borrowers with poorer credit scores face greater challenges even qualifying for an auto loan. The average credit score rose over the last two years from 710 to 715 for new car loans, and from 645 to 655 for used car loans. The percentage of deep subprime loans reached an all-time low of 3.54%, while prime and super-prime lending is on the rise.
The message is clear. Want to pay less for a car? Get your credit score in the best shape possible, and then shop around for the best terms that you can find within your credit range.
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