What You Should Know About Your Credit Score When Financing a Vehicle
Securing auto financing is one of the most complex and challenging aspects of the car-buying process. You must meet specific requirements to qualify for a car loan, one of which is the minimum credit rating. Check out this helpful guide to better understand how your credit score can affect your auto loan.
What Is a Credit Score?
A credit score refers to a three-digit number that gives lenders insight into your ability to make monthly payments on time and eventually pay off your loan. This rating is calculated based on your financing and payment history.
Every consumer has a credit score that ranges from 300 to 850. Your score matters when you’re applying for financing because the lender will use it to determine whether they should loan you money. With a stellar credit rating, you’ll stand a better chance of getting approved for a loan and enjoy a lower interest rate.
What Does an Auto Lender Look For in Your Credit Score?
An auto lender wants to have some assurance that they’ll get back the money they lend you to fund your car purchase. Therefore, they’ll assess the likelihood that you’ll repay your loan by looking at your credit history and current financial situation, primarily reflected in your credit score. When deciding whether to approve your car loan, a lender will look at the five main components of your credit score, which are:
- Payment history: Your payment history indicates how well you’ve kept up with your monthly loan payments and credit card payments as a previous borrower. Late or missed payments, loan defaults, or bankruptcy can hurt this part of your credit report. On the other hand, keeping your credit card balances low or paying off a loan early will help improve your credit rating.
- Outstanding debt: Having less outstanding debt means that you’re more capable of handling another loan. This assessment is also known as your “credit utilization score.” Ideally, you should use no more than 30% of your available credit.
- Types of credit: A lender prefers to give out loans to borrowers with various debt sources. If you’ve proven that you can adequately manage different types of loans simultaneously, your loan approval odds will be better.
- Length of credit history: A lengthy track record of being a reliable borrower is good for your credit score. If you have a credit card, you may want to use it more frequently to show that you can manage your debt responsibly.
- Account age: A long-term credit history on each loan account can also contribute to an excellent credit rating. In contrast, if you open several new credit cards within a short time, it can lower your credit score. Also, it isn’t a good idea to close any of your lines of credit just before you apply for car financing.
What Credit Score Do You Need to Get an Auto Loan?
The minimum credit score for an auto loan may vary from one lender to another. However, if your credit score exceeds 700, you’re in a good position to secure auto financing, even from lenders with stricter requirements. A credit rating above 800 will almost guarantee that you’ll be approved for a car loan. It also gives you an edge when negotiating your interest rate and other loan terms.
Even if your score is between 600 and 750, don’t despair. Many car buyers who fall into this credit score range have successfully obtained an auto loan, especially those who purchased used vehicles. It’s also not uncommon for car loans to be offered to people with credit scores under 600.
Can I Get a Car Loan With Bad Credit?
Yes, it’s possible to get a bad credit car loan. Note that your credit score is only one of the factors a lender looks at when considering your loan application. The following are a few things you can do to improve your chances of obtaining auto financing with bad credit:
- Make a larger down payment: A large down payment can help offset your poor credit score by reducing the amount you need to borrow. In this case, your lender may regard you as a less risky borrower.
- Show financial stability: Even if you have a low credit score, a lender may consider offering you a car loan if they see that you’re stable in other aspects of your financial life. Bringing documents to show that you have a stable job and income and a long-term place of residence can make you appear more reliable.
- Get a co-signer: If you cannot get auto financing due to bad credit, consider enlisting a co-signer. A co-signer can be a parent, sibling, relative, or friend, but they must have a good credit score. However, they’ll be responsible for your debt if you become delinquent or default.
How Does Your Credit Score Affect Your Auto Loan Rate?
Your credit score also plays an important role in calculating your auto loan rate. For a car loan, the difference in interest rates for someone with outstanding credit and someone with bad credit can be as much as 10%.
Let’s see how much you can save on your auto loan if you have good credit. Suppose your exceptional credit score qualifies you for an interest rate of 6%, while a person with poor credit gets a rate of 12%. If you’re financing an $18,000 vehicle with a five-year loan, you’ll pay $50 less each month than the other buyer. That’s $3,000 worth of savings.
Secure an Auto Loan With North Coast Auto Mall of Bedford
If you’re planning to buy a used vehicle in Bedford, Ohio, consider coming to North Coast Auto Mall – Bedford. Besides a vast inventory of quality vehicles, our dealership also offers a wide array of low-interest auto loans to cater to different car buyers. Regardless of your credit score, we can help you secure a loan that suits your financial circumstances perfectly. Contact us today to find out your auto financing options.