What most people don’t really realize is the “cost” of having a mediocre or poor credit score. They go on their merry way paying whatever the lenders say they must when they purchase, whether it be with credit cards, auto loans or home loans. Consumers bemoan the high cost of things, not realizing that they CAN make a huge difference in their own financial lives.
The secret to paying the LOWEST amount for loans of any kind is having a good credit score. Today, the three major credit bureaus CSC/Equifax, Trans Union and Experian, pretty much agree that a 740 score is the benchmark. Let’s look at a real world example of an auto loan from three different score perspectives.
Consumer wants to purchase a $15,000 new car, and has $1,500 as a down payment. Not counting the numerous fees added to the price at closing, let’s just look at the numbers as they are presented here to make the math easy. $15,000 purchase price, minus $1,500 down payment = $13,500 loan amount.
Consumer “A” has a 620 average credit score. He will be fortunate indeed to get a dealership to loan him money at that “poor” score. He probably cannot get a “new” car with that score. He will have to settle for a used car, and will probably pay up to 32% interest. Let’s say he wants a 5 year repayment plan, which is 60 months. 32% interest on the loan is $13,500 = $453.50* payment per month.
$453.50 monthly X 60 months = $27,210 total cost, or $13,710 in interest. In this example, the customer is paying double the price of the car for having poor credit.
Customer “B” wants the same car, and he has a 680 average credit score. He has the same $1,500 for a down payment. $13,500 loan amount X 7% interest = $267.32* per month payment. $267.32 X 60 months = $16,039 total cost, or $2,539 in interest. The customer is paying $2,539 more for the car for having “fair” credit.
Consumer “C” wants the same car, and has a 740 average credit score. He pays the same down payment and is offered zero interest at signing. $13,500 loan amount X 0% interest = $13,500 total cost, divided by 60 months is $225.00 per month for having Good/Excellent credit.
In this analysis, the monthly payments are very dissimilar. The total costs of the car paid by the consumer over 60 months is staggeringly different – let’s look at the difference in interest only: $13,710 vs. $2,539 vs. $0 interest over 60 months. Think about it. Would it be worth it to you to do something about getting your score up where it needs to be to obtain the best rates possible? We can help. Contact us today! Donna Perkins, President
*Note: These examples are calculated using the auto loan calculator at www.bankrate.com; in a real example, there are added fees, and the interest may be calculated differently rather than on a five year note. Your case may differ. If you wish to have a specific quote for your situation, log on to this website and calculate your own example: http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx