If you have bad credit, you probably know who you are. Now that
car dealers are making subprime loans again, you're braced to pay
more for a car loan.
A buyer with prime credit paid an average rate of 4.54 percent
for a five-year new-car loan in April, according to Experian. The
typical subprime buyer paid 9.55 percent -- increasing the payments
on a $25,000 loan by $59 a month.
But what you may not be ready for is a bigger auto insurance
bill. Even with a flawless driving record, a change in your credit
from excellent to subprime easily could cost you an additional $30,
$50 or $100 a month.
Below we offer some detailed examples on how a poor credit
history hits car buyers twice.
"People with bad credit can find life is expensive, even if they
never plan to borrow another dime," says personal finance columnist
Liz Pulliam Weston
, who wrote "The 10 Commandments of Money: Survive and Thrive in
the New Economy."
Bad credit makes life expensive
Americans' credit scores have dropped during the recession. The
average score for someone buying a new car or truck fell six
points, to 761, by late 2011, says Experian, the credit-reporting
agency. The average score of used-vehicle borrowers fell nine
points, to 670.
As the economy recovers, though, lenders are more willing to
offer loans to those who wouldn't have qualified a year or two ago.
New-car loans to customers with poor credit grew by 13.8 percent
last year, says Experian. Used-cars loans to the same group were up
Insurance companies use risk scores (
is the largest provider) calculated from the same credit reports
used for your other credit scores. The calculations are tweaked a
bit but largely reflect your credit situation. Insurers pay
attention to your credit because it's seen as a predictor of claims
-- and car insurance companies hate claims.
How much more does bad credit add to your insurance cost?
There's no easy answer.
California, Hawaii and Massachusetts don't allow insurers to use
credit information to set rates. In states where use of risk scores
is legal, each insurer decides for itself what level of credit is
acceptable and when to begin penalizing drivers below that
Meet Nathan and Jenny
Penny Gusner, CarInsurance.com's consumer analyst, assessed the
damage a poor credit score might wreak on two hypothetical drivers:
Nathan, who is buying a used truck, and Jenny, who is buying a new
Both have unblemished driving records and are looking for "full
coverage" insurance -- not just state-mandated
property damage liability
coverage, but the comprehensive and collision coverage required by
lenders to repair the car itself.
Gusner compared online car insurance quotes for both drivers on
$50,000 liability per injured person, $100,000 per accident and
$50,000 in property damage liability, plus collision and
comprehensive coverage. Jenny and Nathan both chose a $500
We assumed that these drivers arranged 60-month loans at
prevailing average rates and purchased the cheapest insurance
policies Gusner could find.
Credit makes a big difference for both our hypothetical
||740 or above
||700 or higher
||599 and below
||740 or above
||700 or higher
||599 and below
Nathan insures his Nissan Frontier
Nathan is 24 and he lives in Washington state. He's buying 2010
Nissan Frontier truck for $23,800, the Kelley Blue Book private
party value. With a trade-in credit of $5,000, he's financing
$18,800 on a five-year used-car loan.
Depending on his credit, the car loan could cost him as little
as 4.46 percent interest or as much 14.17 percent. At the latter
rate, his monthly payment would increase 25 percent compared to the
rate associated with top-notch credit.
He could pay as little as $74 a month for car insurance, Gusner
found, or as much as $96 -- an increase of 31 percent.
After combining the costs of both his car loan and car
insurance, bad credit would put Nathan on the hook for an extra
$112 a month. Over time, a hit like that takes its toll. (See
"Great credit saves you $22,815 on your car insurance
Jenny, 41, lives in Albany, N.Y., and is the proud buyer of a
new 2012 Toyota Prius with every option. Paying Kelley Blue Book
Fair Purchase Price with $4,500 down, she's financing $28,500 over
Buyers of new vehicles get slightly lower interest rates on
loans than buyers of used cars do, so that's one thing in Jenny's
favor. With outstanding credit, she would pay as little as 3.29
percent for her new-car loan. With subprime credit, though, her
interest rate would triple and increase her monthly payment by 18
Her insurance bill could take an even bigger hit: A subprime
credit rating more than doubles her monthly insurance cost.
All told, a poor credit record would cost Jenny nearly $200 a
What can you do?
You might wonder why Jenny pays so much more for car insurance
than Nathan does.
Nathan, after all, is a young male. In general, your age and sex
matter even more than credit does when determining your car
insurance rates. (See "Estimating car insurance rates: What you
need to know.")
But where you live matters a lot, too, because there's no
getting around the laws in your state that make car insurance cheap
or expensive. Car insurance is much more expensive in New York than
it is in Washington state. A poor credit record simply makes the
You can fix it, though.
"Nothing is permanent in the world of credit," Weston says, "so
it's always possible to rehabilitate your credit even after the
most serious setbacks, and it's worth the effort to do so."
Erasing a foreclosure or bankruptcy typically takes three to
seven years, Weston says.
And, Gusner notes, unless you've put down 20 percent, you'd be
wise to add a gap insurance policy to your coverage -- or risk
deepening your credit troubles if you have a car accident.