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  • Nicholas Hinrichsen

The best way to lower your rate? Make your payments!

Updated: Aug 13

Trying to understand your credit score can be a confusing time. Let’s face it, without a strong understanding of finance and interest rates it is easy to get lost in the jungle of complicated jargon. In the following, we'll take the mystery out of credit score and the relationship to your auto loan rate.


Table of contents

  1. What is a credit score?

  2. What is the relationship between your credit score and interest rate?

  3. How to refinance your auto loan and save thousands of dollars

What is a credit score?

In simple terms though, your credit rating is typically expressed as a FICO or credit score, which ranges from 300 for very challenged credit to 850 for excellent credit.

FICO (www.fico.com) is actually a company that used to have a monopoly on credit scoring. In 2006, the three big credit bureaus (aka credit reporting agencies) Experian, TransUnion and, EquiFax teamed up to develop their own model called VantageScore. VantageScore has undergone multiple iterations since then to better reflect the customer’s credit situation. The latest version is VantageScore 4.0.

The higher the score, the better your rating. Good credit scores are generally 700 and above. From a financial perspective, life becomes significantly easier with a credit score of over 700. Generalizing how your credit score translates into an Annual Percentage Rate (APR) – e.g. interest rate on your car loan – however, is nearly impossible.

Banks create statistical credit models with the goal to estimate a borrower's probability of default and translate these models into rate-sheets. Rate-sheets are easy-to-interpret and unbiased guides that translate your credit score into an interest rate. Modern lenders, in contrast, use technology to calculate APR in real-time. These apps use your credit score, your down payment and your desired loan term as inputs and calculate your interest rate and monthly payment as outputs.

As traditional methods of banking slowly disappear, technology-led credit decisions are becoming the norm. The beauty of technology is that finally customers are empowered to adjust the loan terms to their own needs when applying for a loan e.g. for a new vehicle.

What is the relationship between your credit score and interest rate?


A low credit score, say one around 400, will result in a loan with a high interest rate. There is an upper limit for auto loan interest rates of 30%, which has been set by law. On the other hand, the better your credit score the lower your rate. Interest rates for very good credit can be as low as 2% (and even lower on some new cars).

Some companies structure loans as payday loans, title loans or as monthly rentals to charge customers rates above 30%. That said, if you take out a traditional car loan, you should expect a rate between 0% to 30%.

To help you understand the relationship better, we put together the below illustrative chart. As you can see, interest rates decrease with a better credit score:




Each dot represents a loan, and each loan can move in three directions over time. Moving horizontally to the right indicates an improved credit score. Moving horizontally to the left indicates a worsened credit score. Lastly, eventually the dots disappear, which happens when the loan has been paid off or written off.

The dots do not usually move vertically; meaning, no matter if your credit score improves or decreases your auto loan rate remains fixed. If you are a non-prime borrower, this presents a huge opportunity for you! Over a typical payment period of 6-24 months, your credit score can significantly improve. In fact, a disciplined borrower can very easily improve her score from for example 500 to around 650 and in as little as 12 months!

However, frustratingly your rate does not automatically adjust if you improve your credit. Why is that frustrating? If you were to apply for a new loan with your improved credit score, you would be enjoying a much lower interest rate and monthly payment. You might even be able to take some cash out of your car!



How to refinance your auto loan and save thousands of dollars


The above study suggests that you are stuck paying the same interest rate for the entire term of your auto loan. Fortunately, that's not the case! In our study 'Refinanced a mortgage? How to refinance your auto loan!' we found that a lot of Americans are refinancing their mortgages.


We encourage you to also look into refinancing your auto loan! By refinancing your loan, you will be able to move the dot vertically – meaning you can lower your interest rate and monthly payment. In fact, you might even be able to take some cash out of your car!.


WithClutch.com is a fully digital platform that lets car owners like you do so from the comfort of their own home. No need to set a foot in a bank or credit union. You can lower your rate or get cash in as little as 20 seconds.

Follow three simple steps to refinance your auto loan, get approved in seconds and save thousands in minutes.

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