Your Credit Score & Your Auto Loan: 4 Things You Can Do To Get A Better Interest Rate

October 27, 2014

Have you been thinking about buying a car? Whether you're in the market for a brand new ride or something slightly used, now could be a good time to act.

If you're a new-car fan, you know that most 2015 models have either rolled into showrooms or will soon be on their way. If you're a used-car fan or a bargain shopper, you know there's often an uptick in inventory around this time of year, as others trade in their old rides for the latest and greatest, and as dealers work to get rid of lingering 2014 stock.

Just as importantly, interest rates are low: the average 60-month auto loan currently sits at 4.03 percent, while 36-month loans hover around 3.95 percent. Can you score a better rate? That depends on your credit score.

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Loan marketplace LendingTree recently analyzed 20,000 auto loan offers generated via queries to its website. The offers were for 2014 model-year vehicles, and they were issued between July 2013 and July 2014. What LendingTree found was that small changes in an applicant's credit score could result in big savings (or losings) on interest rates.

For example, borrowers with "good" FICO credit scores (ranging between 700 and 779) nabbed 60-month loans at around 5.14 percent. On a $20,000 loan, that would work out to be $2,722.60 in interest payments over the five years.

However, those with "fair" FICO scores (ranging from 620 to 699) were offered 60-month loans averaging 9.08 percent -- 77 percent higher than those in "good" territory. To those folks, a $20,000 loan would cost some $4,956.40 in interest payments -- over $2,200 more.

(For reference, the average FICO credit score of all applicants included in the survey was 660, and the average loan term was 60 months. You can see a complete rundown of scores in the graphic above.)

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Here are four things you ought to do before going in search of an auto loan. Follow these steps, and you'll be well on your way to earning the best possible interest rate.

1. Get your FICO score: There are a number of credit scoring systems out there, but FICO remains the most popular with lenders. It takes into consideration your individual scores from America's three biggest credit bureaus: Equifax, Experian, and TransUnion. Plenty of websites offer monthly subscriptions that allow you to keep tabs on your FICO score for a fee, but there are also an increasing number of ways to get your FICO score at no cost. For example, some consumer banks such as Chase and Citibank offer access to one or all credit reporting agency scores, and if you have a Discover card, your score comes on your monthly statement. American Express offers a periodic credit score for monitoring purposes.

2. Get your credit report: Your FICO score is really just a numerical summary of your credit history, which is itself summarized in credit reports. By federal law, you're entitled to a free, annual copy of credit reports on file at Equifax, Experian, and TransUnion. Many sites promise to provide those reports, but most are sleazy knock-offs of the legit website, Go through each report and check for inaccuracies. Report any inaccuracies to the appropriate bureau to have them erased or corrected. Some advisers even suggest that you contest legitimate marks against you, because by law, agencies have to respond to complaints within a certain number of days. If they don't -- either because the information is wrong or because they don't have the time to respond -- the negative mark is automatically erased from your record, even if it's accurate.

3. Monitor your credit: They may seem cheesy, but sites like Credit Karma can, in fact, give a fairly accurate picture of your credit score fluctuations. And while they don't typically offer true FICO scores (not for free, anyway), they can explain the complicated math that goes into calculating your FICO score, so you know what elements affect your score most. 

4. Get pre-approved before going shopping: Yes, a dealer may be able to offer you a better rate, but if you don't get pre-approved, you'll never know.

If you have other tips for loan-hunters, share them in the comments below.


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