Good Driver, Bad Credit: What Makes Your Car So Expensive

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Owners of cars with poor credit can pay hundreds, if not thousands, more to drive than those with good credit. This plays out in two important ways: higher rates on auto loans and, in most states, higher insurance premiums. In fact, having bad credit can increase your insurance score even more than if you had been in an accident.

To see how much poor credit can cost car owners, NerdWallet looked at auto loan terms and insurance quotes for drivers with different credit levels.

Auto credit and credit

Drivers with bad credit often choose a cheaper car than they could otherwise afford. However, they will always pay more to own it, especially if they finance the purchase. Good credit is generally considered 690 to 719, while bad credit is less than 630. In a slightly different system, prime credit is 661 to 780 and subprime credit is 501 to 600.

For used car loans in the last quarter of 2017, major credit buyers received an average rate of 5.48%, according to the credit reporting agency Experian. The average rate was much higher, 16.27%, for subprime borrowers.

Let’s say a buyer purchases a used car on a loan of $ 21,000 – just below the average amount financed on used car purchases, according to Edmunds. Using the average rates above, here’s how much each borrower would pay on a 48-month loan:

  • Premium: $ 488 per month and $ 2,433 in total interest
  • Subprime: $ 598 per month and $ 7,706 in total interest

In this example, the cost of bad credit is $ 110 per month and $ 5,273 over the 48-month loan term.

The trap of taking a longer loan

To get a lower monthly payment, buyers increasingly accept longer-term loans – about 42% take out loans for six years or more, according to the Consumer Financial Protection Bureau.

While it is good to make sure that the bills are within your budget, it increases the cost of a car considerably.

With the loan extended to 72 months, the total cost of bad credit becomes $ 8,335, or $ 116 per month over six years.

A different score for insurance

The credit scores used by lenders to determine loan terms are not the same as those used by auto insurers to set your premium.

A credit-based insurance rating is used to predict your likelihood of filing a claim over the next several years, says Lamont Boyd, director of insurance industry scores and analysis at FICO. Insurers can use this and other scoring models to help set rates in all states except California, Hawaii, and Massachusetts, where the practice is prohibited.

NerdWallet looked at the quotes in the rest of the country for drivers with clean records and “good” or “poor” credit, as indicated to the insurer. We averaged the rates of 10 zip codes in each state, then ranked the price difference by state.

We also compared the quotes of drivers with good credit and crash versus similar drivers with bad credit and no crashes, and found that bad credit quotes were often higher. In all but two of the states, drivers can find quotes at least $ 500 cheaper per year for good credit and one accident compared to poor credit and no accidents.

” MORE: Compare auto insurance rates

Insurance costs vary widely

In Michigan, home to some of the highest auto insurance rates in the country, we found that a person with bad credit can pay an average of $ 464 more per month than someone with good credit. credit and the same driving record. The next highest average price increase was $ 185 per month in Kentucky. As in many states, Michigan and Kentucky, average bad credit rates have more than doubled.

On the opposite end of this spectrum is North Carolina, where good drivers with bad credit pay an average of $ 20 more per month for insurance than those with good credit. Iowa was the second cheapest country for motorists with poor credit, with an average cost of $ 37 per month.

Avoid paying

To get the best rate possible, before going to a dealership, check your credit scores and get pre-approved for a car loan. You can still get financing on the spot, but “now you have that trading chip strong enough to help you get an even better rate from the dealership,” says Delvin Davis, senior research analyst at the Center for Responsible Lending.

And even with spotty credit, you can still save money by researching auto insurance quotes. In New York, for example, we found a difference of $ 1,219 (per year) between the lowest and second lowest prices for poor credit – and a difference of $ 5,689 between the highest and the highest. low.

You can also improve your credit score and credit-based insurance score by:

  • Pay all your bills on time
  • Keep credit card balances below 30% of limit

This article was written by NerdWallet and was originally published by The Associated Press.

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