Good Credit Gets Best Car Deals

credit scoreUnless you plan to pay cash for your next car purchase, your credit score will play a large part in your purchase or lease.

You may already know that interest rates for car loans and home mortgages are currently the lowest in history. Special low-interest car loans are common, as are 0% APR (no interest) loans, for as long as 72 months. Many car lease deals now are structured with near-zero finance rates (leases must have some finance charge, even if practically zero). This makes for some incredible new-car deals.

But there’s a “catch.” (Isn’t there always?)

The “catch” is that special low-interest and 0% APR car loans, and special lease rates, are only available to customers with excellent credit.  Car companies call these kinds of customers “well qualified.” You’ll see these conditions stated in the “fine print” that accompanies advertising of the deals.

Anybody who is considering buying or leasing a car should already know their most recent credit score before they visit a dealer. It’s easy enough to get — from one of the online services who specialize in providing credit scores and credit monitoring. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!

Nevertheless, many potential customers are attracted by the deals and find out after visiting a car dealer that they can’t qualify due to a poor credit score. If their scores are not too low, they may still qualify for a “normal” deal with higher finance rates. The worse the credit score, the higher the rate. Of course, if the score is low enough, the customer may not be able to get any deal, at any rate. In those cases, having a co-signer may be the answer — a co-signer with good credit and a good income.

If your score is lower than expected, there may be mistakes in your credit history file. You can get your free credit history (but not your credit score) at AnnualCreditReport.org. If you find mistakes, contact the credit bureau immediately.

So what kind of credit score qualifies for special interest rates and lease deals? How much extra does it cost if you don’t qualify?

Although every bank and finance company sets its own rules for what makes an “excellent” credit score, here’s a typical breakdown:

So what’s the difference between paying 0% APR and, say, 9.9% APR, which might be the case for someone with not-so-great credit?

Example and Comparison

Let’s assume a 60 month (5 year) loan term and a car cost of $30,000, including sales tax. For the sake of simplicity, we’ll assume no down payment (which might not be realistic for someone with poor credit).

0.0% APR loan rate – Payment = $500/month, Total cost of car and loan = $30,000

2.9% APR loan rate – Payment = $537.73/month, Total cost of car and loan = $32,264

5.9% APR loan rate – Payment = $578.59, total cost of car and loan = $34,715

9.9% APR loan rate – Payment = $635.94, Total cost of car and loan = $38,156

For someone whose credit score is so low that they can’t be approved by a conventional bank or finance company, they may choose to buy a used car from a “buy-here-pay-here” car dealer who doesn’t care about customers’ credit but charges the highest finance rate allowed by law in that state. Assuming that rate to be 21% APR, the monthly payment in the above example would be $811.60, and the total cost would be a whopping $48,696 which includes $18,696 in finance charges alone.

In summary, your credit score can make a huge difference in what you pay for a car loan or lease. Without a good credit score, you may not qualify for special promotional rates offered frequently by car companies. Furthermore, you may pay more for auto insurance as many companies now base rates partially on customer credit scores.

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