For a majority of American adults, a car is a necessity of everyday life. From commuting to work to shopping and more – unless you live in a city where everything is within walking distance or have a great public transportation system – there’s no need to travel by car. The big problem that many of us have, however, is that they are incredibly expensive to buy. Sure, you can get an old clunker, but you’ll pay for it in repairs and in terms of all the things you missed or were late for due to unreliability. For most people, buying a new car is part of the American dream. But at an average price of $ 36,270, a new car is not something most of us can afford up front. You have to fund it. And this is where bad credit can double the cost of your next car.
Good credit is good news. The best thing about good credit is that you will get a low interest rate when you buy a car. With exceptional credit, many dealers will offer you rates as low as 1.99% for terms of 5 years (60 months) or less, or 2.99% for terms of up to 7 years (84 months). . Some will allow you to go even longer at slightly higher rates, like each additional year with an extra 0.5%. For people with a score of 775 or higher, buying a car is often full of good options. Obviously, the more you can pay per month, the faster you will own your car and the less interest you will pay. Based on those numbers, here’s what a car repayment will look like based on various monthly payments and the length of the loan, assuming a loan of $ 30,000.
Obviously, the higher the interest rate and the longer your term, the more interest you will end up paying. For each of those five options, here’s the total amount you’ll end up paying:
- $ 650.72 / month for 48 months = $ 31,234.56 total.
- $ 525.70 / month for 60 months = $ 31,542.00 total.
- $ 455.68 / month for 72 months = $ 32,808.96 total.
- $ 396.26 / month for 84 months = $ 33,285.84 total.
- $ 358.60 / month for 96 months = $ 34,425.60 total.
A higher interest rate and a longer term obviously means more interest, but in any case, with great credit you’re looking for very low interest percentages that increase the total cost of your car by less than. 15%, even if you take 8 years to pay.
The bad news about bad credit. Just what is true about good credit? The opposite is true of bad credit. If your credit score is 100 points below 675, your rate for a 5 year loan could be 6.99%; if it is 200 points lower than 575, this rate could drop to 14.99%. Let’s take a look at that same $ 30,000 auto loan and consider the 60 month option, but instead take a look at it for five different interest rates, which are (roughly) 50 point differences. credit. The difference a few percentage points can make is huge in the total amount you need to pay, as well as the monthly payment you’ll need to make.
One thing that surprises people is that different interest rates follow different curves. Did the “good credit” scenario above sound like straight lines to you? That’s the power of a low interest rate: almost everything you pay goes to principal, not interest. The higher your interest rate, the less your principal is paid off up front, which means your payment has to be higher to end at the same time. For a period of 60 months, here are the total costs:
- 1.99% interest at $ 525.70 / month = $ 31,542.00 total.
- 4.99% interest at $ 566.00 / month = $ 33,960.00 total.
- 7.99% interest at $ 608.15 / month = $ 36,489.00 in total.
- Interest of 11.99% at $ 667.18 / month = $ 40,030.80 total.
- Interest of 14.99% at $ 713.54 / month = $ 42,812.40 in total.
Note that with bad credit, even with a relatively short term (5 years), you pay over $ 10,000 more than someone with good credit for the same car.
The only question you should never answer at the dealership. “How much do you want to pay per month for your car?” This is where they really lead you. And by you, I mean they’re selling you a car that you really shouldn’t be buying, given how much interest you’ll have to pay. The dealer has every interest in extending the term of your loan as much as possible; the more monthly payments you make, the more interest you pay. For someone with bad credit and a 14.99% rate on their car loan, here’s how a longer term cuts your monthly payments, but costs you so much more in the long run.
These numbers are terrible; bad credit costs you so much more in the end. Here are the figures for the actual cost of each of these scenarios.
- $ 834.77 / month for 48 months = $ 40,068.96 total.
- $ 713.54 / month for 60 months = $ 42,812.40 total.
- $ 634.19 / month for 72 months = $ 45,661.68 total.
- $ 578.73 / month for 84 months = $ 48,613.32 total.
- $ 538.19 / month for 96 months = $ 51,666.24 total.
If your interest rate was even worse – say 19.99% – an 84 month loan would literally take your total payments to over $ 60,000: more than double the original price of the car.
Now for the worst case scenario: someone with bad credit who answers the question “how much do you want to pay per month for your car?” If you say $ 500 / month, you’re going to pay $ 500 / month for the next 9 years and 3 months: a total of $ 55,500. If you choose a lower number, like $ 400 / month, it will literally take you 18½ years to own this car, and a total cost of $ 88,800!
It’s true that most dealerships won’t give you a loan for more than 84 months, and that’s a good thing: the potential for abuse and predatory lending is already way too high. If you have bad credit, it automatically ends up costing you more in the long run. But if you have bad credit and take longer to pay off your loan, it’s the worst-case scenario, and you can easily end up paying twice as much for your new car just from there. The next time you walk into that dealership, don’t be drawn into a conversation about how much you can afford to pay per month; talk in terms of the interest rate and fight for every fraction of a percent you can get. If you can do the math (and Internet can help), you could get out of there with the best deal your credit score will allow.