Thinking about getting your first car? Wondering how your credit score might affect your car loan rate? Let’s dive into the details with a friendly, down-to-earth approach.

Car Loan Rates: Real Life Example

Jason just landed his first full-time job after college. He's 23, works in an entry-level marketing position, and has a credit score of 640. He's eyeing a Honda Accord to make his daily commute smoother. However, due to student loans, his credit isn't stellar. Jason wants to get financing but hopes to improve his credit score over the next six months to get a better interest rate.

How Your Credit Score Affects Car Loan Rates

You may be wondering why your credit score matters when getting an auto loan. Simply put, the higher your credit score, the lower the interest rate you’ll likely get. Here’s a basic idea:

• Excellent Credit (781-850): You get the best rates.

• Good Credit (661-780): Rates are a bit higher.

• Fair Credit (601-660): Rates begin to jump up but are still pretty reasonable. 

• Poor Credit (501-600): You’ll see even higher rates, easily over 13% for new cars and 19% for used cars.

• Bad Credit (300-500): The highest rates, approximately 16% for new cars and 22% for used cars(from some dealer).

Jason’s score of 640 puts him in the fair credit range, meaning he’ll face higher interest rates compared to someone with good or excellent credit. But don’t worry, there are ways he can improve his credit score.

Factors That Affect Auto Loan Interest Rates

Apart from your credit score, several other factors influence the interest rate on your car loan:

1. Lender Choice

Different lenders offer different rates. Credit unions, like First Alliance, often provide more competitive rates than traditional banks or dealerships. However, it's wise to shop around and compare.

2. Loan Term

Shorter loan terms usually come with lower interest rates. While a 72-month loan might have lower monthly payments, a 36-month loan will save you money in the long run.

3. Down Payment

A larger down payment reduces the loan amount, which can lower the interest rate. It also shows lenders that you're financially responsible. In case you're wondering, a good down-payment number tends to be between 10 - 20% of the  buying price. 

4. Economic Conditions

Market conditions and the Federal Reserve's interest rates also play a role. When the federal funds rate is high, expect higher loan rates.

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How Jason Can Improve His Credit Score

Jason plans to buy a car in six months, giving him time to boost his credit score and secure a better rate. Here’s what he can do:

1. Pay Bills on Time

Payment history is crucial. Jason should ensure he pays all his bills on time to avoid negative marks on his credit report. First Alliance Credit Union offers tools to help set up automatic payments and reminders via online and mobile banking.

2. Reduce Debt

Jason can work on reducing his credit card balances. Lowering his credit utilization rate can positively impact his credit score. First Alliance Credit Union provides personalized financial advice to help members manage and reduce debt.

3. Avoid New Credit Applications

Applying for new credit can temporarily lower Jason’s score. He should avoid new credit inquiries until after he secures his car loan.

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Finding the Best Auto Loan Rate

When Jason is ready to buy, he'll need to shop around. Here's how he can find the best rates:

1. Get Preapproved

Jason should apply for preapproval with multiple lenders to compare rates. Preapproval gives him a clearer picture of what he can afford and locks in the interest rate for a set period.

2. Use a Car Loan Payment Calculator

Using tools like a car loan payment calculator helps Jason understand how different interest rates and loan terms affect his monthly payments.

3. Consider a Co-signer

If Jason's credit score doesn’t improve as much as he hopes, asking a family member with good credit to co-sign the loan can help him secure a lower rate.

Jason's Journey to a New Car

Six months later, Jason’s hard work pays off. His credit score improves to 680, moving him into the Good Credit category. He shops around, uses a car loan payment calculator, and gets preapproved at First Alliance Credit Union. He decides on a shorter loan term of 36 months and makes a larger down payment. This combination helps him secure a competitive interest rate, making his dream of owning a Honda Accord a reality.

So, what do you need to know about car loan rates by credit score?

Buying a car is a significant financial decision, especially for young adults starting their careers. Understanding how your credit score affects your car loan rate is the first step towards making a smart purchase. Remember, improving your credit score, shopping around for the best rates, and considering factors like loan term and down payment can save you a lot of money. So, whether you're like Jason, eager to buy a new car, or just planning for the future, these tips will help you navigate the world of auto loans with confidence. At First Alliance Credit Union, we're here to support you on your financial journey with friendly advice and competitive auto loan rates.

How can First Alliance Credit Union Car Loan Rates Help You Lower Payments

First Alliance Credit Union is committed to helping you achieve your financial goals. Here’s how we can support you:

• Competitive Rates: We offer lower interest rates compared to traditional banks, making it more affordable for you to finance your car.

• Personalized Financial Advice: Speak with our Member Advisors, like Jason did, to create a tailored plan to improve your credit score. Get taught how to monitor your credit score using our Credit Score Tool in our online banking app. We’ll help you understand your credit report and suggest actionable steps to boost your score. 

• Preapproval Process: Get preapproved for a car loan to know exactly what you can afford. This helps you shop with confidence and locks in your interest rate for a set period.

• Flexible Loan Terms: Choose a loan term that fits your budget. We offer a variety of options to ensure you get the best deal.

• Support Tools: Use our car loan payment calculator to see how different interest rates and loan terms affect your monthly payments. This tool helps you make informed decisions. 

Have more questions? Ask us!