You can get a car with a bad credit score, but it could cost $10,000 more

A good credit score can save you as much as $10,000 on a car. A bad score can cost you that much.

Your credit score largely determines how much interest you pay on a car loan. And interest rates are running high.

The average new car loan was $40,366 in 2023. But the total cost of the loan can range from $46,419 to $57,339, depending on the interest rate, according to an analysis by the personal finance site MarketWatch Guides.

The average used car loan was $26,685. Factor in the interest, though, and the total cost of that loan ranges from $32,205 to $43,812.

Interest rates on car loans are as high as they’ve been in years. The average rate on a new car ranges from 5.4%, for those with the highest credit scores, to 15.6%, for those with the weakest credit, according to Experian. For used cars, the average interest rate ranges from 6.8% to a whopping 21.6%, depending on your credit score.

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What is a good credit score for a car loan?

Even a consumer with poor credit can get a car loan. But the loan will probably come with a sky-high interest rate, dramatically increasing the full cost of the car.

“If you have a low interest rate, you’re going to potentially pay thousands of dollars less than if you have a high interest rate,” said Kimberly Palmer, a personal finance expert at NerdWallet.

The wide spread in interest rates on car loans reflects a complicated calculus. If you have a lower credit score, auto lenders think you’re a bigger risk. And an automobile is a shrinking asset: With every passing year, as a general rule, it’s worth less.

The interest rate “is pricing in the risk that the lender is taking on to loan you money for an asset that is depreciating,” Palmer said.

The good news: Cars are more plentiful now than in the last few years. Prices are high, but not rising. The average new car costs about $49,000, while the average used car costs about $29,000.

More good news: The car-loan industry “is a really competitive one,” Palmer said. Lenders want your business.

Here are some tips for saving money on your next car.

Choose a less popular car

Some models are hot. Others are not. Look for cars “that people aren’t buying as much,” said Brian Moody, executive editor of Kelley Blue Book and Autotrader.

“There’s a car called an Acura ILX that has been discontinued,” he said. “I’m sure it’s a terrific car, but most people are not online looking for an Acura ILX.”

Less-loved cars often come at a discount. Look for discontinued models, sedans and less familiar brands.

Avoid fancy features

Luxury features such as heated seats, sunroofs and high-end sound systems can sharply increase the price of a car. Think about which ones you really need.

Also, “the more stuff you have on that car, the more opportunities you have for things to fail,” said Lisa Gill, an investigative reporter at Consumer Reports.

Buy a car without a backup camera

The backup camera became standard in 2018. If you buy an older car, you can save thousands of dollars by choosing one without a camera. Then, you can buy one yourself.

“You can add a backup camera for about 800 dollars,” Moody said.

Find out your credit score

Many consumers walk into a showroom unaware of what their credit score is, or how it might impact their purchase, experts say.

“I think the biggest mistake any person can make is just to stroll into a car dealer, new or used, and not know what your credit score is,” Gill said.

Many banks and credit card companies will let you see your credit score for free.

FICO Score 8 is the metric commonly used for car loans, Gill said. You can go to the FICO website and see your score, for a fee. Gill says it’s worth the money.

Get preapproved for a car loan

It’s also a mistake, experts say, to go into a car dealership without a preapproved loan.

“I would absolutely go to my bank or credit union first and get preapproved,” Moody said.

With preapproval, a lender checks your credit and determines how much you can borrow and at what rate.

Preapproval “is basically a lender saying, ‘We’ve figured out that this is your budget,’” said David Straughan, senior automotive journalist at MarketWatch.

With preapproval in hand, “you’d be amazed at how willing the dealers are to work with you,” Straughan said, because they know you are ready to buy.

Shop around for a loan

Start by approaching your own bank for a car loan. If you have weaker credit, consider joining a credit union.

Credit unions are chartered “almost like a nonprofit,” Gill said. “And, typically, one of their charters is that they improve the community’s ability to purchase cars and homes.” That means they offer competitive rates.

Once you’ve secured preapproval, “give the dealer the opportunity to beat the deal you have from your bank,” Moody said.

Make a larger down payment

Putting more money down on a car purchase accomplishes several good things.

First, it lowers your potential interest rate. Interest rates rise and fall partly on loan-to-value ratio, Straughan said. A bigger down payment means a lower rate.

Second, it means lower monthly payments, because you’re borrowing less money.

Third, it means you pay less interest over the lifetime of the loan because, again, you’re borrowing less money.

Work on your credit score

If you have some time before your car purchase, try to raise your credit score.

According to the MarketWatch analysis, if you raise your score from 650 to 700, you could potentially lower your interest rate from 14% to under 10% on a used vehicle, saving you more than $3,000.

Get a free copy of your credit report. Look for “errors that could pull that score down,” Gill said, including accounts wrongly listed as delinquent or in collection. Report them to the credit bureaus.

Try to pay down high credit-card balances. Credit agencies reward you for using less of your available credit.

If you have a missed payment on your credit report, Gill said, ask the creditor to forgive it.

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Remember: You can always refinance

Even if you end up saddled with a “bad” car loan, one with a steep interest rate and payments, you can always refinance.

Work on raising your credit score. A higher score opens up lower rates on a potential refinance, experts say.

Interest rates could go down in the next six months to a year, Straughan said, creating a chance for you to seize a better rate.