How Your Credit Score Affects Your Auto Loan Rate

How Credit Scores Are Used in Auto Lending

When you apply for an auto loan, lenders review your credit report and credit scores to assess your creditworthiness. According to the Consumer Financial Protection Bureau (CFPB), these are some of the most important factors in determining the rate a lender will offer you. In general, a lower credit score means you’re likely to receive a higher interest rate, which costs you more over the life of the loan.

Lenders use credit scoring models that consider factors like payment history, amounts owed, length of credit history, new credit, and credit mix. Your credit score is a numeric summary of the information in your credit report, and it helps lenders predict how likely you are to repay the loan on time.

• Credit scores are not the only factor, but they are a critical one in auto lending.
• A higher credit score typically leads to a lower interest rate.
• Even a small difference in rate can add up to significant savings or costs over a multi-year loan.

Sources: Consumer Financial Protection Bureau, Lexington Law

Typical Rate Ranges by Credit Band

To give you an idea of how rates can vary, here are average annual percentage rates (APRs) for new and used car loans by credit score band, as reported by Experian and presented by Lexington Law. Note that these are benchmarks, not current offers, and actual rates depend on the lender, loan term, vehicle, and other factors.

The table below groups borrowers into five credit bands, from super prime (720 or higher) to deep subprime (below 580). The difference between the best and worst credit tiers is stark: for a new car, the average APR for super prime borrowers is about 5.2%, compared to over 14% for deep subprime borrowers. For used cars, the spread is even wider, with deep subprime rates averaging over 21%.

Sources: Lexington Law

How to Check Your Credit Score

Before you apply for a car loan, you should know where your credit stands. Checking your own credit score or credit report does not hurt your score; it’s considered a soft inquiry. You can request a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once every 12 months through AnnualCreditReport.com. Many banks, credit card issuers, and financial apps also offer free credit score monitoring.

When you check your credit, review it for errors that could drag down your score. If you find inaccuracies, you can dispute them with the credit bureau, which may help improve your score in the long run.

• Free annual credit reports from each major bureau are available at AnnualCreditReport.com.
• Checking your own score is a soft inquiry and does not harm your credit.
• Look for errors such as late payments you did not make, accounts that aren’t yours, or incorrect balances.

Sources: Consumer Financial Protection Bureau

Steps to Improve Your Credit Before Applying

Improving your credit takes time, but even a few months of good habits can make a meaningful difference. Here are practical steps you can take—some may have a quicker impact than others.

Start by paying all your bills on time. Payment history is the largest factor in your credit scores. If you have past late payments, focus on building a track record of on-time payments going forward. Next, reduce your credit card balances. Keeping your credit utilization—the amount you owe compared to your credit limits—low can improve your scores. Aim to pay down balances to below 30% of your credit limits, and ideally lower.

It’s also wise to avoid opening several new credit accounts in a short period, as that can temporarily lower your scores. And if you have older accounts in good standing, keep them open—length of credit history matters.

• Make all payments on time.
• Pay down credit card balances to lower your credit utilization.
• Avoid opening too many new accounts before applying for an auto loan.
• Check your credit reports for errors and dispute any inaccuracies.

Sources: Consumer Financial Protection Bureau

When to Wait vs Apply for a Loan

One of the most important decisions is whether to apply now or wait until your credit improves. If your score is on the edge of a better credit band, waiting a few months to qualify for a lower rate could save you hundreds or even thousands of dollars over the life of the loan. For example, the difference in APR between the prime and nonprime bands for a used car is about 4.5 percentage points. On a $20,000, five-year loan, that could mean paying over $2,000 more in interest.

However, waiting isn’t always the right choice. If you need a car now for work or family, a higher rate may be acceptable. In that case, consider financing with a co-signer who has better credit—if that’s an option—or shop around at different lenders, since offerings can vary. Also, keep in mind that interest rates are negotiable, so shop around and leverage quotes from multiple lenders to get the best deal.

Sources: Consumer Financial Protection Bureau, Lexington Law