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Rental companies like Hertz are selling cars: This credit score will you get the best rate on an auto loan

Twenty/20

The drop in travel caused by the coronavirus pandemic has caused troubles for the car rental industry, which could make this is a good time to buy a new-to-you set of wheels.

Hertz, one of the world's largest auto rental companies, put more cars on the market in May, the same month it announced it was filing for Chapter 11 bankruptcy. And it started selling vehicles at discount prices, such as 2019 Chevrolet Corvette Z06 models — originally starting at around $81,000 — for under $60,000.

If you're shopping for a car, a used rental might be your best bet right now — and if you plan to finance your vehicle, your credit score will determine how good a deal you get. "A credit score is very important. Lenders automatically sort applicants into credit score tiers, and the offers and rates applicants receive are based on the tier they're in," says Jenn Jones, auto writer at LendingTree.

To qualify for the best rate on an auto loan, Jones explains that you need a score of at least 720. Some lenders use an auto-specific score to evaluate the likelihood you'll pay back an auto loan. And about 90% of car loan lenders use FICO's auto score, credit expert Gerri Detweiler told Grow last year. So checking your regular credit score is a good indicator of how auto lenders are likely to see you.

A better credit score can save you real money

FICO's auto scores range from 250 to 900 and look specifically at your creditworthiness for auto loans. When calculating this score, the usual factors matter, like your payment history and utilization rate. There's also more weight put on your history with car-related debt. 

The auto industry's range of scores fall into five categories ranging from excellent (superprime) to bad (deep subprime). For the best, or superprime, rate, you'll need what's considered excellent credit, but you don't need a perfect score: According to FICO, you'll typically qualify for the superprime rate with an auto loan score of 720. 

For example, if your FICO auto score is 700, you'll fall within the "good" range, according to FICO's calculator. The average used car loan amount for superprime drivers is $22,013, according to Experian, so you might qualify for the good (or prime) rate of 5.7% on a $22,013 loan paid over 48 months. At a rate of 5.7%, your monthly payments will be $514 and you'll pay $2,653 in interest.

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If your FICO auto score is 720 or above, you qualify for the superprime rate of 4.3%, on a new car, according to FICO's Loan Savings Calculator. Your monthly payments will dip to about $500, saving you $14 each month, and you'll pay $1,979 in interest over 48 months.

In other words, with a score of 720 instead of 700, you'd qualify for the superprime rate and pay $674 less in interest over the life of the loan. 

How to get a good deal buying a used rental

Rental companies are looking to sell cars, but you should be smart about the way you approach buying them. Matt DeLorenzo, senior managing editor at Kelley Blue Book, says doing some research about comparable cars can help you when bargaining.

"While the pricing on a used rental car may look attractive, keep in mind mileage and other factors such as wear and tear from many different drivers as part of your value equation," DeLorenzo says. "Most used rental sales units operate on a fixed, one-price, no-haggle basis, so don't expect to go in there with a low-ball offer and expect to get your price."

When calculating your offer, it also helps to understand the maintenance structure rental companies adhere to: "Rental companies have their vehicles on fairly strict maintenance schedules since they want to maximize their time in service and avoid costly downtime with unnecessary repairs," DeLorenzo explains.

How to improve your credit score

You can get your credit in great shape to become eligible for a better rate on an auto loan. Small changes can make a big difference to your credit score, Ted Rossman, industry analyst at Bankrate told Grow last month. And, he says, "the most impactful thing that consumers can do to quickly improve their credit score is to lower their credit utilization ratio." 

Your credit utilization rate, which is the amount of credit you're currently using divided by the total amount of credit you have available, is the second biggest factor when calculating your credit score. It accounts for nearly a third, or 30%, of your score, based on FICO's model.

That means if you have a $1,000 balance on a card with a $5,000 line of credit, your utilization rate on that card is 20%. If the total credit you have available across two credit cards is $10,000 and you have a total balance of $1,000, then your overall utilization rate is 10%. "Most people with the highest credit scores keep it below 10%," Rossman says.

While this could be the time to buy a used rental car, you'll want to do your research and get your credit score up to secure the best prices. "Buyers of used rental cars can get good deals," says DeLorenzo. "But they have to have the right set of expectations in what constitutes a good deal."

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