Before getting your heart set on the perfect new or used car you need to understand how much you can afford to pay for a vehicle. If you are thinking about buying a car, you first need to check your credit score. Next you must compare different interest rates that depend on whether you have good or bad credit. Most people do not realize how bad credit can affect their car buying experience.
Average Interest Rates for Good Credit
Car buyers who have a credit rating from about 700 to 850 have good-to-excellent credit. These buyers will pay between 3% and 4% interest on their car loan. When shopping for a new or used car dealerships usually advertise no money down for qualified buyers — to qualify for this option you often need a very good credit score over 800. It may make more sense to wait a few months and increase your credit score before applying for a loan. You could save thousands of dollars on your car purchase with a lower interest rate.
Average Interest Rates for Bad Credit
In today’s economy more and more people are facing average or bad credit scores. When people were out of work they may have missed payments on credit cards or even experienced a foreclosure. These are the same people who may have babied their car but are in desperate need of a newer more reliable model. The average interest rate for someone with average credit is about 5% to 6%. The interest rate for someone with bad credit varies from 6.5% all the way up to 12.9% or more on average.
If you are able to boost your credit score before applying for a loan you could save thousands of dollars in interest over the life of the loan. When you are thinking about your budget and how much you can realistically pay for a car, keep your credit score in mind and how much you will likely pay for interest.
Even if the dealership is able to get the payments down to a reasonable amount by extending the terms of the loan, make sure you are not paying more than the vehicle is actually worth. Overall, keep in mind that your credit score – good or bad – has long term consequences.