How to negotiate low interest when applying for a loan to buy a car?
People with low credit scores pay hundreds, and perhaps thousands of dollars more to own a car than those with good credit.
This happens for two reasons: higher interest rates on auto loans and, in almost all states, higher insurance premiums.
In fact, having a bad credit rating can drive your insurance quote higher than if you had an accident on your record.
Credits for car purchase
People with less than perfect credit scores often buy cheaper vehicles than they could otherwise afford.
And yet they end up paying more for it, especially if they financed the purchase. Generally a good credit is from 690 to 719 points, and a bad one from 630 and below.
In a slightly different system, an excellent credit rating is 661 to 780 points and a high risk rating is 501 to 600.
For those with risky credit, the average rate was much higher, 16.27%.
Let’s say a consumer buys a used car with a loan of $ 21,000, just under the average amount financed for the purchase of used vehicles, an auto dealership site.
Based on the averages mentioned above, this is what each buyer would pay in interest for a 48-month loan:
- Excellent: $ 488 per month and $ 2,433 total
- Risky: $ 598 per month and $ 7,706 total
In this example, the cost of having bad credit is $ 110 more per month and $ 5,273 over the life of the 48-month loan.
The long-term credit trap
In order to pay a lower monthly amount, more and more buyers are taking a longer-term loan. About 42% take loans for six years or more, according to the Consumer Financial Protection Bureau (CFPB).
Although they have a reason to keep their payments within budget, it dramatically increases the cost of owning a car.
If the loan is extended to 72 months, the total cost of having bad credit increases to $ 116 a month or $ 8,335 in six years.
Auto insurance quote
The credit scale that lenders use to determine the conditions of a loan is not the same that auto insurers use to determine the premium that an insured will pay.
A credit scale is used to predict the likelihood of a consumer filing an insurance claim over the next several years, says Lamont Boyd, director of insurance ratings and analytics at FICO.
Insurers can use this and other rating models to set interest rates except in California, Hawaii and Massachusetts, where this practice is prohibited.
NerdWallet analyzed the quotes in the rest of the country for drivers who have a clean record and “good” or “bad” credit reported to the insurer.
We averaged the rates for 10 zip codes in each state and then ranked the price difference by state.
We also compared quotes given to drivers with good credit and one accident versus drivers with bad credit and no accidents, and found that quotes for people with bad credit are generally higher.
In all but two states it is possible to find quotes at least $ 500 lower per year if you have good credit and an accident compared to those with bad credit and no accidents.
Avoid paying more
To get the best possible rate, check your credit score and get pre-approved auto loan before you go to the auto dealership.
They will still be able to give you financing on the spot, “but now you have a pretty strong card that will help you get an even better rate,” says Delvin Davis, an analyst at the Center for Responsible Lending.
And even with bad credit, you can save by comparing insurance quotes.
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