Whether you have your eye on a shiny new sports car or a used sedan, buying a car is exciting. But even before you decide on the make or model, you need to make sure that you qualify for an auto loan. In addition to gainful employment, one of the most important factors involved is your credit score.
Your credit score is a figure that represents your ability to pay back a loan. This number can sit anywhere between 300 and 850, with 850 being the highest score possible. Several different factors make up your credit score. For instance, how often you use your credit cards, the balance and whether you pay on time are three of the most important considerations.
In addition, the number of times your credit is pulled can also negatively affect your credit score. If it’s a soft pull, it’s not recorded on your credit.
When you apply for a new credit card, lenders perform a hard pull, which does show on your credit report. If you have too many inquiries in a short period of time, it looks as if you are desperate for credit.
Before You Shop
If you plan on buying your new car in cash, then your credit score might not matter. However, like most people, you probably can’t afford to purchase a vehicle outright and that’s where your credit score comes into play.
If you don’t know your credit score or are concerned that it’s too low for approval, we have both good news and bad news. The good news is that it’s highly probable that you can find a lender who will approve you for an auto loan, even if your credit is less than stellar. The bad news is that if your credit is not so good, you’re going to pay a lot more than if you have a high credit score.
In a nutshell, your credit score is what lenders use to determine how much of a risk you are. If your credit is perfect, then the lender is just about guaranteed that they won’t have to hunt you down and repossess the car. Since you’re considered low risk, you’ll probably be offered a much lower interest rate.
On the other hand, if your credit is less than perfect, you may be considered a flight risk; meaning you may default. As such, lenders will either deny you or inflate the interest rate.
Things to Consider
If your credit score is above 700, starting interest rates can be as low as five percent. As your credit score decreases, your rates gradually increase. If your credit score is lower than 500, you may end up paying upward of 15 percent or more in interest.
How Can I Find Out My Credit Score?
Word to the wise: You don’t have to pay to see your credit score. Your credit score is reported by three major credit reporting agencies; Equifax, TransUnion, and Experian.
In addition to Free Credit Report.com, there are also other free sites like Credit Karma where you can review your overall credit picture.
How Can I Increase My Credit Score?
Only 19.9 percent of the population having perfect credit; meaning that their score falls between 800 and 850.
While that’s a lofty goal, keep in mind that 18.2 percent of the population’s credit falls in the 740 to 790 range and 21.5 percent falls in between 670 and 739.
If your credit score is low, there are several things you can do. If you need to buy a car immediately, you may have to settle for a higher interest rate. However, if possible, it might be a better idea to wait and find out why your credit score is low. Most times, free credit reports give an itemized report of why your score is what it is.
If your score is low due to high credit card balances, take a few months and pay as much as you can to bring those balances down. Remember that most companies report to credit bureaus only once a month, so make sure to space your payments out in a timely fashion.
If your credit score is low due to more serious issues such as default or delinquencies, it might be a good idea to talk with a financial planner and figure your next move. A financial planner can help you reach an agreement with your debtors to help you pay off your debt and increase your credit score.
If time is of the essence and you need a car to commute, you might want to consider buying a used car. In addition to costing less, the monthly payment will probably be lower as well. Furthermore, buying a used vehicle gives you just enough wiggle room to focus on repairing your credit.
Keep in mind that the lower your score, the larger the differential between the used and new rates. While you’ll probably find a better deal, you should still try to pay as little as possible, even when buying a used car.
While your credit score isn’t the only determining factor of creditworthiness, it is important when trying to qualify for an auto loan. Having good credit does open doors, however, it doesn’t always get you approved for the loan. Most car dealers take other factors into account when determining loan eligibility. For example, let’s say that you are going through a messy divorce and had to close some of your credit card accounts.
A car dealer is able to see that they were closed at your request, not because you didn’t pay. That’s not to say that every car dealer will turn a blind eye, but it definitely helps when you are able to explain the situation and back it up with positive job references and good payment history.
What You Can Do
Keep in mind there’s a huge difference between having a low credit score because you haven’t established a lot of credit and have a low score because of unpaid credit cards or defaulted loans.
If your score is less than 700, you need to keep an accurate paper trail. In particular, you need to make sure that you always make your credit card payments on time. If you are successful, you may be able to secure a lower rate with that perfect credit score.
If your credit score is 500 or below, even following the above-mentioned steps probably won’t help very much. However, that doesn’t mean you should work towards improving your credit score. It does mean that you will probably have a higher down payment and will end up paying a higher interest rate.
In situations where even putting down a hefty lump sum isn’t an option, you may need a co-signer; someone with good credit to sign for you. If so, this ca secure a much lower interest rate. However, failure to make payments means that their credit will be negatively affected.
So, do you need perfect credit to buy a car? Like most financial questions, the answer isn’t always black or white. In all honesty, car dealers want and need to sell cars. If you don’t qualify for the loan, they don’t make a profit.
With that said, a dealer is more likely to find a way to get you the loan than to walk away from a possible sale. And if that means a higher interest rate, only you can decide if it’s right for you.
The key to getting approved for a car loan is finding out exactly what your credit score is beforehand. If there are any glaring errors, correct those prior to applying for a loan.