Why we pay more for cars with bad credit

Why poor people pay more for cars — and what they can do about it

You’ve probably heard a car commercial that blared, “Got good credit? Bad credit? No problem!” But there is a problem. A big one, according to new research.

People with the highest credit scores can pay less than 3 percent interest on a new auto loan — while those with bad credit get stuck with interest rates sometimes above 19 percent. That’s according to a yearlong study just released by LendingTree, which also looks at how those percentages translate into real cash.

A person with a “fair” credit rating buying a $20,000 vehicle with a typical 5-year loan will pay about $2,200 more than someone with a “good” rating buying the exact same vehicle, LendingTree says.

The “fair” guy could have a credit score of 699, and the “good” guy 700. But whether they’re one point apart or 80 points, one is going to end up two grand poorer than the other.

You can see how much more you’ll pay for cars with bad credit in this graphic ….

LendingTree Average Auto Loan INFO

How it all adds up

LendingTree breaks credit into five rankings — excellent, good, fair, poor, bad — and spells out average interest rates based on the length of the loan. It’s based on “real consumers who requested financing for a new 2014 vehicle over the past year and received loan offers through LendingTree” — although they don’t say how many consumers the data represents.

Rates range from 2.77 percent (3-year-loan with excellent credit) to 18.45 percent (4 years and bad credit).

LendingTree says that the average person who took out a 5-year loan for a 2014 vehicle has a credit score of 660, falling into the “fair” category. However, a score 40 points higher would cut that person’s rate almost in half — 5.14 percent compared to 9.08 percent.

That’s the guy saving $2,200.

It roughly halves again if you move up to the “excellent” tier, saving almost $1,000 more. Which just goes to show that improving your credit is worth it, regardless of where you fall right now.


How to find out your credit score — and raise it

Your credit score affects not just your rate on auto loans but on credit cards, mortgages, and any other kind of credit. You’d think something so important would be free and shown to you whenever you want credit, but that’s not how it works.

Instead, you need to buy it directly from Experian, Equifax, or TransUnion — the three major credit bureaus — for about $12. Or you can sign up for a free trial of their credit monitoring services, take a peek, and remember to cancel it so you don’t get auto-billed monthly.

There’s also something called a credit report, which is the data credit scores are based on. You can request one from each bureau every 12 months for free, but you won’t see the exact magic number.

Your credit score is calculated based on five factors:

  1. payment history
  2. debt utilization ratio
  3. length of credit use
  4. new credit applications
  5. types of credit in use

If you have a credit report, you can figure out a ballpark figure using a credit score calculator.  You might also spot areas for improvement. Here are some tips to boost your score…

  • Pay down your balance in full each month instead of making minimum payments.
  • Be aware of your credit score, even if you don’t have credit cards and think you don’t have a credit history. Do some research so you can start getting a sense of where you stand. Checking your own credit score will not lower your overall score.
  • Don’t close unused credit cards; this will likely not help your credit score.
  • Have more than two credit cards open at one time. But make sure you aren’t signing up for more and more credit cards just to improve your score all at once, because that could look risky.
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