Your Credit Score Impacts Your Monthly Payment – Here’s How

May 4th, 2017 by

In the financial world, your credit score is undeniably important, driving things like lending caps, interest rates, which credit cards are available to you, and, of course, your new vehicle’s monthly payment. If you’re paying too much a month and you’re not sure why, learning a little more about your credit score may help you clear things up a bit – and help you learn what to do about it.

Breaking Down Your Car Payment

When most people purchase cars, they don’t pay outright in cash. Instead, they finance. Financing your car, or taking out an auto loan, essentially means that a bank or other lender is paying the dealership for your car on your behalf, and you agree to pay them back. As such, your payment is made up of two components: the principal, or the amount that actually goes towards the amount of your loan, and the interest. Interest is based on the rate you agreed to when you signed loan paperwork, often ranging between zero percent and ten percent.

How Your Credit Score Impacts Your Monthly Payment

The Effects of Your Credit Score

Your credit score impacts your finance agreement. First, it affects who will lend to you. Lenders like to minimize their risk, and a borrower with a low score is a higher risk. In addition, your credit score impacts the interest rate you receive. Purchasers with good credit scores will qualify for lower rates, while first-time buyers, anyone without a solid credit history, or anyone with a lower score will have to pay a little more on top of the principal.

Other Factors Impacting Monthly Payments

Having a good credit score is a big deal, but it isn’t the only thing that impacts monthly payments. For example, banks are often willing to offer lower rates for shorter loans. Your loan payments will be higher with a shorter term, but you’ll pay less overall. Longer terms will have you paying out less a month, but more over the lifetime of your loan. Your down payment can also play a part; the bigger your down payment, the lower your interest rate will be.

Before you buy a car, it’s a good idea to check out your credit score. You can easily do this through free online tools like CreditKarma. If your score is low, you may end up paying a little extra, but there’s an upside: making on-time payments on an auto loan can significantly improve your credit score, setting you up to save money should you choose to refinance or buy a car in the future.

Calculate your monthly payment now

A few late payments every now and then may not seem like such a big deal, but poor spending habits could end up costing you more than you think. By paying your car loan on time you’ll boost your scores, allowing you to lower your monthly payments and put more money in your pocket at the end of every month. And let’s face it – who doesn’t want that?


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