Interest rate calculator: How your credit score affects car financing

Thousands of dollars.

That could be the difference between lower and higher credit scores when financing a vehicle, based on an interest-rate calculator at nerdwallet.com and data reported by Experian.

Here’s what we mean:

The average nonprime borrower, with a 601-660 credit score, could borrow money for a vehicle purchase at 10.34% interest on average for a used vehicle, according to recent data from Experian.

Interest rate calculator

Purchasing a used vehicle for $22,000 with a $2,500 down payment and financing for 60 months would result in monthly payments of $418 and total interest payments of $5,555 over the five-year term.

That monthly payment is steeper than the average used-vehicle payment but still would be within the limit of 20% of annual income suggested by most financial experts, assuming you are earning the U.S. household median $75,000 and making no other vehicle payments.

But a subprime borrower (501-600 credit score), would get the funds at 16.14% interest on average, with total interest payments of $9,039, or almost $3,500 more over 60 months.

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Meanwhile, a prime customer (661-780) could get a 5.97% rate on average and pay $3,103 interest total, or about $2,452 less than the nonprime borrower and a whopping $5,900 less than the subprime borrower, based on Experian data and a nerdwallet.com calculator.

Because a better credit score may result in a better interest rate, it typically would result in a lower monthly payment as well with all other factors in the transaction – car price, down payment and financing term – remaining the same. Using our example interest rates above, payments from high to low would be $466, $418 and $377, respectively, a savings of more or less $50 per month.

(Interest rates frequently change and currently are slightly higher at all credit levels than the examples, which were based on Experian data from December 2019.)

So what can the nonprime or subprime borrower do to narrow the gap?

Changing the arithmetic

It is possible to change the arithmetic of a lower credit score by increasing your down payment, financing for fewer months or delaying your purchase until you can boost your score.

If the nonprime borrower we used in our example was able to make a $5,000 down payment, for example, he/she would save about $700 over the life of the contract, or about two monthly payments, based on nerdwallet.com, while a $7,500 down payment would save more than $1,400.

Simply financing for 48 months instead of 60, the buyer would save more than $1,160 in interest, while financing for 36 months would almost double to about $2,300.

But there is no question that delaying your purchase until you can raise your score could have the most dramatic impact on your interest rate and, therefore, your interest payments. Under the circumstances described in our original example, a buyer could save nearly $600 for every 1-point reduction in interest. More on this below under our “Long-term solution.”

A new vehicle instead?

And then there’s the idea of buying a new $22,000 vehicle instead of a used one.

While buying a used vehicle instead of new may get you more features or a more-desirable model, buying a new vehicle instead of used would save nearly $1,600 in interest over a 60-month term – 7.52% on average versus 10.34% interest – based on Experian data and the nerdwallet.com calculator. That also translates to a lower monthly payment for the new vehicle all other factors being equal.

That difference becomes even more significant for lower credit scores and higher interest rates.

For example, the average interest rate on a used car recently was 19.98% for a deep subprime borrower but 14.41% on average for a new car, a difference in total interest for our example of more than $3,500. The lower interest rate also would result in monthly payments about $60 less.

Or you could purchase a new vehicle costing about $23,351 – about $1,300 more – for the same $418 monthly payment, according to the Santander Consumer USA calculator.

The long-term solution

Ultimately, the best way to affect the interest rate on your car payments is to improve your credit score.

That may be easier said than done – it can take months of regular, on-time payments on current debt – but the payoff can be significant as Experian data shows.

The average APR on a new car shrinks nearly 3% by improving from deep subprime (300-500) to subprime and about 4.5% by improving from subprime to nonprime. That average range on a new car between superprime (781-850) and deep subprime is almost 11%!

If you’re planning to purchase a $22,000 new vehicle with deep subprime credit averaging about 14.41%, expect to pay nearly $8,000 total interest with a monthly payment around $458. But improve your credit score to subprime at about 11.89% on average and you can expect total interest payments of less than $6,500 with a monthly payment of about $433.

For a $22,000 used vehicle in our example, a borrower with deep subprime credit and an average 19.98% interest rate can expect a $516 monthly payment, while a subprime customer with an average 16.14% interest rate could expect to pay about $475 a month.

It’s a lot of math, but these examples show that improving even one credit level can save a lot of money.

And something over which you can exercise some control.

That’s the bottom line on how your credit score affects car financing.

These statements are informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.

Santander Consumer USA is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.

Credit scores and FICO scores are not the sole factor in lending decisions by Santander Consumer USA.

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