How does my credit score affect my car loan interest rate?

I’m looking to buy a car in the next few months and will need a loan. After checking my credit score, I noticed it’s mid-600s, and I’ve heard from friends that credit scores impact car loan rates—but I don’t know exactly how or by how much. How does my credit score specifically affect the interest rate I’ll be offered on a car loan, and what kind of rate difference might I realistically expect compared to someone with a higher score?

Your credit score directly impacts your car loan interest rate because lenders use it to assess your creditworthiness and determine the risk of lending to you. Here’s how it works:

1. Risk-Based Pricing:
   Lenders set interest rates based on perceived risk. Higher credit scores indicate lower risk of default, resulting in lower interest rates. Lower scores signal higher risk, leading to higher rates to offset potential losses.

2. Interest Rate Tiers:

   • Exceptional (800–850): Qualifies for the lowest rates, often 1–3% annual percentage rate (APR).
   • Very Good (740–799): Rates typically 3–5% APR.
   • Good (670–739): Rates around 5–8% APR.
   • Fair (580–669): Rates rise to 8–15% APR.
   • Poor (300–579): May face rates of 15–20% APR or higher, or face denial.

3. Total Loan Cost Impact:
   A 5-point difference in your score can save you thousands. For a $25,000 loan over 5 years:

   • 700+ score: ~$3,000–$4,000 in total interest.
   • 600–699 score: ~$6,000–$8,000 interest.
   • 500s score: ~$10,000+ interest.

4. Loan Approval Odds:
   Scores below 580 may result in loan rejection or require a cosigner/collateral. Higher scores improve approval chances and offer more lender options.

5. Down Payment and Terms:
   Lower scores may mandate larger down payments (e.g., 10–20% vs. 0–5% for high scores) and shorter loan terms, increasing monthly payments.

6. Shopping Around Considerations:
   Rate-shopping (e.g., for preapproval triggers) may cause minor credit score dips due to hard inquiries, but multiple inquiries within 14–45 days count as one event, minimizing impact. Higher scores allow more leverage to negotiate better terms.

7. Credit Score Factors:
   Key elements influencing your score:

   • Payment history (35%): On-time payments boost scores.
   • Credit utilization (30%): High balances (e.g., >30% of limits) hurt scores.
   • Credit history length (15%): Longer history benefits scores.
   • Credit mix (10%): Diverse accounts (installment, revolving) help.
   • New credit (10%): Frequent applications may lower scores.

8. Long-Term Savings:
   Improving your score before applying (e.g., by paying down debt or correcting errors) can secure significantly lower rates. A 50–100 point improvement might reduce your APR by 2–5 percentage points.

9. Lender-Specific Variations:
   Rates vary by institution. Credit unions and online lenders may offer better deals than traditional banks for mid-range scores. Dealerships often mark up rates as profit; securing financing independently can prevent this.

In summary, higher credit scores qualify you for lower interest rates, reducing overall borrowing costs, while lower scores increase expenses and limit options. Maintaining or improving your credit score before applying is crucial for favorable car loan terms.