New Study Shows Low Credit Score Can Cost Thousands Over the Lifetime of an Auto Loan
Inside Subprime: Jan 3, 2018
By Ben Moore
A consumer’s credit score is one of the most important factors taken into consideration when auto lenders determine whether a customer is eligible to receive an auto loan. A strong credit score can lead to low interest rates and dramatic savings over the lifetime of the auto loan, while lower credit scores can result in immediate disqualification, or an auto loan with extremely high interest rates.
Experian Automotive recently released new data that reveals the long-term costs of high interest auto loans for poor credit borrowers. The data revealed that the second quarter of 2018 had an average of 5.76 percent interest rate for new auto loans, which was just above the average 4.45 percent rate for prime borrowers (borrowers with credit scores between 661 and 780). Super-prime borrowers (borrowers with credit scores above 781) had an average interest rate of 3.47 percent. Non-prime borrowers (borrowers with scores between 601 and 660) were charged an average of 7.55 percent interest. However, borrower’s in the subprime category (borrower’s between 501-600) saw an average of 12.14 interest on average, while deep subprime borrowers (borrower’s with scores between 300-500) received an average of 14.93 percent interest rate.
For used cars, the discrepancy between borrowers with strong credit and borrowers with poor credit is even greater. Deep subprime borrowers saw an average of 19.51 percent for used cars compared to super prime borrowers’ average of 4.19 percent. The average used car loan reached a new record high earlier this year, coming in at $19,708 total with monthly payments averaging just under $380.
The effect of a poor credit score is compounded by the increase in length in auto loan terms. An average car loan term in the 1980’s was around 50 months, but today’s average car loan is usually 69 months for a new car and 64 months for a used one. As the length of the loan term increases, so does the cost of the car, with more money being spent in the long run. For example, a $19,000 used car loan with an average 9.4 percent interest rate would see a monthly payment of around $500 for a 48 month period. A super prime customer would pay less, around $450 a month, and would eventually end up saving $2,200 compared to the subprime borrower.
Interestingly, the study also documented the states with the highest percentage of borrowers holding auto loan balances 30 days past due; leading that ignominious list is Mississippi (3.71%), Maryland (3.62%) and Louisiana (3.28%). For loan balances 60 days past due, Louisiana (1.08%), Mississippi (1.14%) and Maryland are again in the “lead.” (Though New Mexico is a close fourth at .84%.)
As the cost of owning a car continues to rise, so do the consequences of poor credit. Borrowers with low credit scores face difficulty even qualifying for an auto loan, and once they do, can expect a dramatic markup in terms of the long-term cost of the car. When it comes to buying a car, putting the time and effort into improving a poor credit score can lead to substantial savings in the long run.