A buyer with fair or poor credit can still get a used car loan, but it will cost more. Lenders charge higher interest rates when they see more risk of missed payments. The gap between a good rate and a poor one can add thousands of dollars over the life of a loan. Anyone shopping for used cars in phoenix with a lower score has several ways to shrink that gap. Most of them work best before the first loan application.
Why Lower Credit Raises the Cost of a Car Loan
Lenders use credit scores to predict whether a borrower will pay on time. The most common scores run from 300 to 850. FICO, the company behind the most widely used score, calls scores from 580 to 669 fair. Scores below that are generally called poor.
A lower score usually brings a higher interest rate. Used car loans also tend to carry higher rates than new car loans, because the car is worth less as security. A buyer with fair credit shopping for a used car often faces both effects at once.
The Monthly Payment Hides the Real Cost
Many buyers focus on the monthly payment. A longer loan term is the easiest way to bring that payment down. The catch is the total interest.
Take a $15,000 loan as an example. At 9 percent for 60 months, the payment is about $311, and total interest comes to roughly $3,680. At 15 percent for 60 months, the payment rises to about $357, with around $6,410 in interest. Stretch that 15 percent loan to 72 months, and the payment drops to about $317. Total interest climbs to about $7,840.
The 72 month payment looks almost the same as the 9 percent payment. The real cost is more than double.
Dealers arrange loans through a network of lenders. This is convenient, and sometimes the dealer finds a good rate. Dealers can also add a small markup to the rate the lender approves. A buyer comparing used cars in phoenix can bring a written outside quote to each dealer and ask for it to be matched.
Common Questions About Credit and Car Loans
Can a car loan improve a credit score?
Yes. On time payments are reported to the credit bureaus and build a stronger history over time. Late payments do the opposite.
Is refinancing possible later?
Often, yes. After a year or so of steady payments and a better score, a borrower can apply for a new loan at a lower rate. The new loan pays off the old one.
Should a buyer accept the first approval?
Not without comparing it. An approval is an offer, and other lenders may offer better terms on the same car.
Keeping the Total Cost in View
With fair or poor credit, the loan deserves as much attention as the car. Comparing offers by total interest paid shows which loan truly costs less. A shorter term with a slightly higher payment usually saves the most money over the life of the loan.
