My first car was a used Jeep whose horn worked 50% of the time and that the dealer couldn’t wait to get rid of owing to its less-than-popular manual transmission. Admittedly—and much to my enduring embarrassment—I consistently stalled out at just about every stop sign for a few weeks but, in time, I came to rely on my car to get me to class, work, and the occasional social gathering. A car, for me, was freedom, and it was a freedom afforded to me by an auto loan.
If you’re in the market for a car and want to learn more about how you can get one at an affordable rate then you’re in the right place. We’ll be going through the ins and outs of the credit score(s) that determine just how costly your version of freedom on four wheels will be. So, fasten your seat belts, and let’s hit the road.
Fun Fact: in 2019 85.4% of new cars and 55.5% of used cars were financed.
Simply put, your auto score is a variant of your credit score that lenders will use to decide whether to extend you a car loan and, if they do, what interest rate to provide you with. Much like your more generic credit score, your auto score is generated using the data gathered by the three major credit bureaus (Experian, Equifax, and TransUnion). They gather your financial data, feed it into their proprietary algorithms, and out pops a three-digit number that determines just how much that auto loan will end up costing you.
Interestingly, credit reporting agencies are able to manipulate the algorithms they use to suit a certain lender’s needs. This is why you’ll find that your credit score differs depending on what type of credit you are applying for. For example, you might see a FICO 8 bankcard score used by credit card companies when evaluating your credit card application and another score entirely when applying for a home loan—different lenders value different attributes in their borrowers, thus different scores allow for this nuance.
Unfortunately, it is not possible to always know what score your lender will use to evaluate your loan application. It could be the VantageScore offered by the major credit bureaus, one of the ever-popular FICO variants, one entirely unique to a specific lender or a combination of them. Luckily for us, most scores rely on the same set of five factors with the only difference between each one being the weighting of the factors:
For our purposes here we will be looking at the FICO® 8 Auto Score. It is a popular score that ranges from 250-900 with a higher score indicating a lower credit risk borrower (i.e. there is a higher chance that you will make your loan payments). Or, in other words, the higher your FICO Auto score the better loan terms you will get because lenders see you as a good borrower.
Unlike the traditional FICO score, which ranges from 300-850, the auto score variant is scaled between 250 and 900. So, before we go any further, let’s take a look at what exactly constitutes a ‘good credit score’ with this differently scaled score:
We’ll dive more deeply into how you can go about maintaining and improving a good credit score later on. For now, however, let’s continue our exploration of credit with how we can access and monitor our credit scores.
The aphorism “knowledge is power” rings true even in the realm of credit scores and auto loans. In fact, as a general rule, knowing your credit score—regardless of whether you are in the market for a loan or not—is an excellent financial health practice. Keeping track of what is reported on your credit on a monthly or quarterly basis allows you to catch any errors in reporting that could end up hurting your credit score in the long run and keeps you informed as to what loan terms you might qualify for. Here are a few of your options for keeping tabs on your credit report:
It is worth highlighting this again: most methods of checking your credit report will not give you your exact auto score. Rather, they will provide you with your generic credit score (250-850 scoring range) and the factors influencing it which is just as well for you because the same factors that impact your generic FICO score will also influence your auto score.
Ok, you’ve checked your credit score, and you’re feeling pretty good but why does it matter? Well, like many things when it comes to your credit score, it’s a numbers game. Let’s take a look at an example with two people: person A has a good credit score and person B has a poor one. They both take out a $10,000 loan with a 60-month term but have different interest rates due to their differing credit scores:
Person A (Good Credit)
Person B (Poor Credit)
For those of you keeping track at home, the customer with poor credit is paying $36.01 more each month and $2,160.60 more over the life of the loan than the individual with good credit. In this case, the numbers should speak for themselves: while a poor credit score will not preclude you from getting a loan it will make the loan itself more expensive.
Fun Fact: in 2019 the average interest rate for a new car loan was 6.16% and 10.06% for used cars.
Now, if you’ve checked your credit and found it lacking don’t start worrying just yet; the beauty of your credit score is that it can change. More to the point, you can change it with diligence, foresight, and planning. Here are some tips for taking control of your credit and starting down the road towards a good credit score:
It’s important to remember that building and maintaining a good credit score is by no means a quick process. There are no magic bullets that will raise your credit score by hundreds of points overnight. Anyone that claims they are able to do that is probably not being entirely honest with you. That said, if you’re in the market for a car and don’t have time to build up your credit, never fear: a bad credit auto loan may be for you. We won’t discuss them too deeply here but it is worth knowing that they exist.
We’re getting near the end of this particular post, and, instead of harping on the same credit stuff we’ve looked at so far, I’d like to lighten it up a bit and share a few of my car buying tips/tricks to think about before applying for your next auto loan. Hopefully, they’ll help you with your personal car buying quest.
My first bit of advice is to remember that a car is not an investment, it is an asset. An investment appreciates in value over time, your car will not (unless you’re buying a collectible car). In fact, you’ll find that a new car loses a good portion of its value the moment you buy it. As such, it is often worthwhile to look for a used car instead of a new one. Just make sure you do your research into a used car’s history before buying; you don’t want to end up with a lemon—Experian’s Autocheck vehicle history reports or Carfax are great tools for protecting yourself from this.
Lastly, to bring us back into the realm of credit, consider searching for your loan within a two week period. When applying for a loan, creditors will formally pull your credit report which can actually hurt your score. It’s a strange counterintuitive quirk of the lending world, but if you do all your shopping around—and you should shop around for the best interest rate—within a fourteen-day period it only counts as a single credit inquiry.
Well, that’s all I’ve got, best of luck on your car search!