In a nutshell, a better credit score means lower interest rates on car loans.
If you are thinking of buying a car, bringing your credit score to a good to excellent/exceptional FICO® Score range (a score of 670 or better) will help immensely with lowering the annual percentage rate (APR) you have to pay. According to FICO calculations for a 5-year, $30,000 loan, there is a difference in the interest paid even within one category of borrowers. For instance, FICO reports that people with a FICO Score between 660–689 would pay a 9.8% APR. This amounts to $630/month and the total interest would come out to $8,113. On the other hand, someone with a score in the range of 690-719 would pay 8.1% which amounts to $611/month and $6,644 as total interest paid.
In the long run, you end up saving close to $1,500 as someone on the higher end of the good credit score range. So, someone at the lower end of a good credit score may still end up paying more than someone on the upper end of the same category. Similarly, a person with an 800 credit score might pay relatively higher interest rates than someone with an 820-850.
But, with an excellent credit score, you are more likely to pay a lower interest rate than someone with a good credit score. The difference in the total interest paid for someone with a good versus excellent credit score could be anywhere between $1,000-$3,000, according to FICO data.
Investing in a car is a big decision that can impact your finances in the long run. So, it’s important to work on your credit score before finalizing a deal. It is also advisable to save up for a sizable down payment to lower the number of installments and interest rates you pay.
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