Auto Loans: How Your Credit Rating Affects Your Deal

Before you shop for auto loans, it can be worthwhile to check your credit report. Interest rates on auto loans can vary wildly depending on your credit score, and a difference of as little as 10 points on your credit score can significantly affect your interest rate and the deal you get on a car.

Only a small percentage of buyers have the luxury of purchasing new cars without a loan, according to Experion, a credit-scoring agency. A recent report from the agency shows that borrowers, on average, financed about $30,000 for a new vehicle in the fourth quarter of 2015. That's a $1,170 increase in amount financed from the previous year.

How Interest Rates Can Vary

A consumer with excellent credit would pay $2,593 in interest over the life of a 60-month loan for a new car. A buyer with a credit score in the range of 620-659, a fair rating, typically would pay about $5,100 more in interest on the same loan.

The outlook is also dreary for consumers with poor credit looking to buy a used car, as their monthly payment on a 48-month, $15,000 loan could be almost $100 higher than someone with good credit.

According to our auto loan calculator, here's how a 48-month, $15,000 used auto loan breaks down.

Credit score APR Monthly Payment Total Interest Paid

Excellent credit (720-850) 3.759 $337 $1,179

Good credit (690-718) 5.298 $347 $1,678

Moderate credit (660-689) 7.581 $363 $2.436

Fair credit (620-659) 10.178 $382 $3,323

Poor credit (590-610) 15.042 $418 $5,053

Bad credit (500-589) 16.17 $426 $5,468

Small Steps to Better Credit

Borrowers with poor or moderate credit can get a better deal by taking a few steps to improve their credit score before applying for a loan.

1) Know your score. A 2015 LendingTree survey showed that almost 60 percent of Americans don't know their credit score. Keeping track of your financial health can help you make choices now that will affect the types of interest rates and loans you will receive in the future. You can check your credit score for free right here on LendingTree.

2) Monitor your monthly bills. About one-third of your credit score is comprised of your bill-paying history. Make sure to always pay your bills on time, as late and non-payments can significantly lower your score.

3) Use your credit cards wisely. Showing that you can use credit cards responsibly can raise your credit score. Even if you are carrying a balance, make sure to make at least the minimum payment on time every month and that your monthly debt payments are less than 20 percent of your monthly income.

Financial institutions also suggest that borrowers continue to use credit cards sometimes, as lenders like to see that borrowers can handle credit. Try to keep your balance below 30 percent of your approved credit limit.

4) Get pre-approved. When you're ready, apply for a loan pre-approval before you head to the car dealership. This will let you know what kind of loan you can get from your bank and will give you a starting point for negotiating with the car dealer.

Taking the time to change your personal financial practices to increase your credit score can pay off when it comes time to apply for auto loans. Sometimes, even a small increase in your score will move you into a new credit score bracket that could mean hundreds of dollars in savings on the cost of a car.

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