Believe it or not, credit reporting has been around for just under 200 years, and today, it seems to rule many of the decisions we make as adults.
Our financial identities seem un-erasable at times when our credit is low, and our options are limited.
Knowing how your credit score affects a car loan will put you ahead in your attempt to get a car, even if your credit is low.
In 2017, the average monthly car payment was $515. By the end of that year, Americans had accumulated almost $600 billion in auto loans.
Do you want to learn about how your credit score will affect your potential car loan?
Here’s a guide that will tell you all about it.
What Is a Credit Score?
Everyone’s credit score consists of 3 numbers. Those numbers relate to how likely you are to repay debt and to repay it on time.
The more late payments or unpaid debt you have, the more your credit will decrease.
Lenders and banks use your credit score to choose whether or not to approve you for a loan or a credit card.
What Do the Numbers Mean?
The highest credit score you can have is 850, with numbers 720 to 850 deemed to be exceptional scores.
If your credit number lies anywhere from 740 to 799, you have very good credit, even though it’s not “exceptional.” These numbers indicate that those with excellent credit are generally responsible when it comes to managing their debt.
A good credit score ranges from 670 to 739. It’s around or slightly above the American average.
Those with good credit still earn competitive rates for the most part, but it’s harder for them to get approved for some types of credit.
Those with a “fair” credit score (580 to 669) are in the average category. Even though they have some dings on their credit, there aren’t any significant delinquencies.
Anything below 580 is considered poor. It’s unlikely anyone with credit from 300 to 579 will get approved for new credit.
New credit typically starts at 350, but it’s much easier to build good credit from new credit than good credit from poor credit.
Why Does Your Credit Score Matter?
Your credit score represents your ability to pay back a loan. The higher your credit score, the more likely you are to get approved for a loan. Your high credit score means there’s a high probability that you’ll pay back that loan.
And the higher the score, the more likely you are also to make your payments on time, which puts you at a lower risk level from a lender’s standpoint.
Typically, the credit bureaus which include Experian, TransUnion, and Equifax, are where lenders go to pull your credit file in order to get a credit score.
How Credit Score Affects a Car Loan
Those with very good to exceptional credit scores typically qualify for significantly lower interest rates, and in some cases, qualify for 0% financing.
People with lower credit scores inevitably face higher interest rates. It could also affect a required down payment amount, depending on what the loan is for.
Car dealerships and sellers will typically ask for a higher down payment when a credit score is low.
The low score represents a high risk, and thus, the lender has to protect themselves by wanting to recover a good chunk of the loan in a short period of time.
Even those with poor credit usually have a good standing with at least one lender.
For example, you may have been delinquent with credit cards, but have paid your VW monthly payments for your current vehicle on time, every time.
If you have a good standing with that lender, they’ll be likely to lend to you again, even with fair or poor credit.
What Can You Help Your Situation If Your Credit Is Poor?
If you’re not far off from landing yourself in the “fair” category and you can afford to wait a few months or more to get a new car, there are some things you can do to try and build your credit back up.
For example, if you have credit cards, try to get that debt down so that you have more available to you than you have used.
This is sometimes referred to as the debt-to-credit ratio. At all times, if you want your credit score to remain in good standing, try and make sure you’re never using more than 30% of your available credit. Keeping your credit utilization ratio low is a critical factor in y our score calculation.
Even if you get approved through a subprime dealership or lender, they might offer you a loan at almost 20%. Be wary of those dealerships that attract no or low credit customers.
You can still shop around for the best deal. Try your own bank’s credit union or any other institution that has a relationship with you. If you’ve been a customer before, they’ll probably deem you as a lower risk. As a result, you’ll get your financing at a better rate.
Remember to do all your shopping around at the same time. It’s OK to allow several lenders to run checks, resulting in several hard pulls, as long as you do it all within the same 30 days.
If you’re perusing for an auto loan, and you have multiple hard inquiries all within that 30-day period, your FICO score will usually only count it as 1.
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You Can Still Get a Car with Low Credit
Even if you don’t have the best credit, it’s still possible to get an auto loan. But knowing how credit score affects a car loan will help.
When you offer more significant down payment or opt to borrow from a lender you’ve worked with before, it increases your chances of being deemed reliable.
Do everything you can to boost your credit and shop around before you commit. Just make sure you don’t do multiple hard credit pulls over more than a 30-day period.
You’ll quickly boost your score with a short-term investment that allows you to piggyback on the perfect credit of others so that you can get a better rate and longer-term savings when you get that auto loan.