Your Credit Score is a primary factor in determining a competitive interest rate (or "APR") for your loan.
High Credit Score = Best Available APR Lower Credit Score = Higher APR (But how much higher?)
You can easily obtain your credit reports from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion) at AnnualCreditReport.com. Under the FACT amendment to the Fair Credit Reporting Act you are entitled to one free credit report from each credit reporting agency in a twelve month period.
Unfortunately, a credit score is not included and must be purchased. Your credit score may be purchased from AnnualCreditReport.com or from each of the credit reporting agencies: equifax.com, experian.com and transunion.com. Pricing and terms vary. Beware of offers which provide “free” quotes in return for expensive monthly services. Check cancellation requirements.
Prime Customer/Direct Lending
If your credit score is 680 or more (or you are in the upper 50% to 60% of credit scores), you will likely qualify for the best interest rates available.* These rates are often the advertised rates.
If you think you qualify for the best interest rates available, call your bank, credit union, or current lender for a rate quote. Often, these lenders can check your credit score and quote a rate within a few minutes. Comparison shop by calling other banks in your area for rate quotes. If your bank or credit union is not the lowest rate, you should tell them. They may lower their rate as they want your business.
If successful: Congratulations, you are a prime customer and qualify for a competitive rate and “Direct Lending”!
Non Prime or Sub Prime Customer/Indirect Lending
If your credit score is below 680 (or you are in the lower 40% to 50% of credit scores), it is unlikely you will qualify for the best rates available and it is difficult to determine a “competitive” APR.
The reason: Every specialty finance company determines rates based on their proprietary risk models. The APR for any one Customer could vary by up to 2% and possibly more.
Depending upon how much lower your credit score is, it can be challenging to find a lender that will take a credit application from you directly. Ordinarily, the Dealership will make arrangements to finance your vehicle through “specialty finance companies”. Specialty finance companies usually work exclusively through Dealerships. The Dealership “originates” a retail installment sales contract with you and “sells” it to a lender. This is known as “Indirect Lending” and you are categorized as a “Non prime or Sub prime customer”. While specialty finance companies compete fiercely for loan volume at the dealership level, the dealership may not always pass on the lowest available APR to the customer.
Your access to a competitive process is restricted. Still you need to be aware of how severe your credit risk may be perceived in order to evaluate loan offers.
Thoroughly review your credit reports for accuracy and know your credit score! This can save you money!
If your credit score is below 500, finding a loan at even a high APR will be very difficult. If possible, defer the purchase of your vehicle and find ways to improve your credit score. (Click here for Very Low Credit Scores.)
*Your credit score is not the only factor considered in an auto loan. Your income, your monthly payments for housing, years at current employer or years in current occupation, years at current address, etc. are also important factors to a lender. Your credit score could be 750 yet not qualify for prime lending and the best rates available. The credit scores noted are FICO scores which range from 300 to 850.