Your credit score is a crucial financial metric that affects many aspects of your life, including your ability to secure loans, credit cards, and even your car insurance rates. One area where your credit score can have a significant impact is on your car loan. Your credit score plays a pivotal role in determining the interest rate you’ll receive on your auto loan, and this can result in thousands of dollars in extra costs over the life of your loan. Additionally, a poor credit score can also lead to higher car insurance rates. In this post, we’ll explore the cost of bad credit on car loans and car insurance rates, backed by interest rate data from Experian’s Q3 2023 report.
The Impact of Your Credit Score on $30,000 Car Loan
When it comes to financing a new or used car, your credit score can make a substantial difference in the terms you’re offered by lenders. The table below illustrates how credit scores affect car loan rates and the subsequent impact on monthly payments and interest costs for both new and used cars. In this example we’ll examine the payments on a $30,000 car loan:
$30,000 New Car Loan Costs by Credit Score
| Credit Score Range | New Car Term | Rate* | Monthly Payment | Interest Cost |
| Great Credit (781-850) | 75 months | 5.61% | $519.10 | $8,932.50 |
| Good Credit (661-780) | 75 months | 6.88% | $538.91 | $10,418.25 |
| Fair Credit (601-660) | 72 months | 9.29% | $595.53 | $12,878.16 |
| Poor Credit (501-600) | 72 months | 11.86% | $638.39 | $15,964.08 |
| Bad Credit (300-500) | 72 months | 14.17% | $678.35 | $18,841.20 |
As seen in the table, borrowers with excellent credit scores (781-850) can secure a new car loan at a significantly lower interest rate of 5.61%, resulting in a monthly payment of $519.10 and total interest costs of $8,932.50 over the loan’s term. On the other hand, individuals with bad credit car loans (scores: 300-500) face a substantially higher interest rate of 14.17%, leading to a monthly payment of $678.35 and total interest costs of $18,841.20 for the same loan term. The difference in interest costs between great and bad credit can be a staggering $9,908.70.
$30,000 Used Car Loan Costs by Credit Score
| Credit Score Range | Used Car Term | Rate* | Monthly Payment | Interest Cost |
| Great Credit (781-850) | 72 months | 7.43% | $565.58 | $10,721.76 |
| Good Credit (661-780) | 72 months | 9.33% | $596.18 | $12,924.96 |
| Fair Credit (601-660) | 72 months | 13.53% | $667.14 | $18,034.08 |
| Poor Credit (501-600) | 72 months | 18.39% | $754.78 | $24,344.16 |
| Bad Credit (300-500) | 66 months | 21.18% | $844.68 | $25,748.88 |
Similarly, for used car loans, credit scores have a significant impact on the cost of financing. Those with great credit can secure a loan at a 7.43% interest rate, resulting in a monthly payment of $565.58 and total interest costs of $10,721.76. In contrast, individuals with bad credit face a much higher interest rate of 21.18%, leading to a monthly payment of $844.68 and total interest costs of $25,748.88 for a shorter loan term. The difference in interest costs between great and bad credit in this case is an astounding $15,027.12.
It’s essential to understand that these numbers represent the financial consequences of your credit score when applying for a car loan. A lower credit score not only means higher interest rates but also larger monthly payments and significantly more money spent on interest over the life of the loan.
The Impact of Your Credit Score on Car Insurance Rates
Apart from affecting your car loan costs, your credit score can also influence your car insurance rates. Many insurance companies use credit-based insurance scores to assess the risk associated with insuring a particular individual. The theory behind this is that individuals with better credit scores are considered more financially responsible and less likely to file claims. Consequently, they are often rewarded with lower insurance premiums.
Conversely, individuals with lower credit scores may face higher car insurance rates. These higher rates can translate into thousands of dollars in additional insurance costs over the years. While car insurance rates vary by location and provider, the impact of your credit score remains consistent.
Improving Your Credit Score
Given the substantial financial consequences of a poor credit score, it’s crucial to take steps to improve your credit score. Here are some strategies to help boost your credit score:
- Pay Your Bills on Time: Consistently paying your bills, including credit card payments, loan installments, and utility bills, by their due dates is the most effective way to improve your credit score.
- Reduce Credit Card Balances: High credit card balances relative to your credit limit can negatively impact your credit score. Aim to keep your credit card balances low, ideally below 30% of your credit limit.
- Avoid Opening Too Many New Accounts: Each new credit application can result in a hard inquiry on your credit report, potentially lowering your score. Only apply for credit when necessary.
- Check Your Credit Report: Monitor your credit reports for errors or inaccuracies. Dispute any discrepancies you find to ensure your credit score accurately reflects your financial history.
- Use a Secured Credit Card: If you have a low credit score or limited credit history, a secured credit card can be an excellent way to build or rebuild your credit. It requires a security deposit but can help you establish a positive credit history.
- Seek Professional Help: If you’re overwhelmed or unsure about how to improve your credit score, consider consulting with a credit counselor or working with a credit repair company.
Wrapping It Up
Your credit score has a profound impact on your financial well-being, affecting not only your ability to secure loans but also the cost of those loans and your car insurance rates. As demonstrated by the data from Experian’s Q3 2023 report, a poor credit score can cost you thousands of dollars over the life of a car loan and result in significantly higher car insurance premiums.
Understanding the importance of your credit score and taking steps to improve it can lead to substantial savings and better financial opportunities. By practicing responsible financial habits and monitoring your credit, you can work towards a brighter financial future and avoid the unnecessary costs associated with bad credit.
AutoByPayment.com offers accurate estimates of new and used car loan payments based on self-selected credit score, current rebates, down payment, and trade equity or negative equity, without customers having to provide their personal identifying information such as email and phone.
