We all know that, when it comes to financing, interest rates vary according to a person’s credit worthiness. Borrowers with a healthier credit history typically pay a lower interest rate than those with a spotty credit past. But did you know that, not only does your credit score influence your interest rate, but where you borrow might also determine how much interest you pay?
Personal finance expert WalletHub recently analyzed financing offers from nearly 160 lenders and discovered that where you borrow your money can make a difference in how much that borrowed money costs you.
Credit Score Is Still King
How much you pay to borrow money (the interest rate) still depends primarily on how solid your credit past is. Do you have a history of not borrowing too much and paying up on time for the loans you do have? WalletHub found that borrowers with just a fair credit score (620-659) on average will pay roughly four-and-a-half times more for financing than someone with an excellent credit score (720 and above). In numbers, it means a borrower with a fair credit score pays, on average, an extra $5,300 more in interest payments over the course of a $20,000 car loan borrowed over 5 years. This is why we recommend knowing your credit score before searching for financing.
Where Are the Lowest Interest Rates?
No matter what your credit score is, you may pay less interest at some lenders than at others. WalletHub found that your best chance for low interest rates is with carmakers’ own financing divisions. These are lenders such as Ford Motor Credit, Hyundai Motor Finance and Toyota Motor Credit Corporation. On average, such captive lenders offer interest rates at about 49 percent below the average for new-car loans. When you find a new-car dealer offering a 0 percent interest rate, you can bet it’s with that brand’s captive lender. Credit unions charge roughly 23 percent less than the average rate.
Where Are the Highest Interest Rates?
WalletHub concluded that regional banks charge the highest rates — at about 43 percent above the average. This is followed by national banks such as Wells Fargo and Bank of America, which charge rates about 10 percent above the average.
What it means to you: Those no- and low-interest loans offered by a carmaker’s own lending subsidiary at the dealership are tough to qualify for unless you have near-perfect credit. But that’s where you should begin your financing search. If that fails, join a credit union. You’ll still get a good deal on the interest rate, and they are more forgiving.