Credit Score for Car Loan
Do you have plans to purchase a new car? Automobiles today can be really expensive, not to mention the maintenance they need to keep them smoothly running. Don’t forget the insurance costs that protect you from huge expenses should you, unfortunately, have an auto accident.
Buying a car can be a luxury, and that is why many people who desire to have a vehicle of their own rely on car loans. In fact, 44% of adults in the United States apply for a loan just to buy a car. Studies showed that the average loan amount for a new car is $31,099 in 2017 which is $509 higher than the average loan amount in 2016. According to the data from Experian Automotive, the average monthly loan payment used to purchase a new car reached a total of $523 in the first quarter of 2018.
However, do you know that lenders check on your credit history before granting you the loan? Yes, lenders look at the person’s credit score and from there they determine whether or not to give you the loan. A credit score represents the individual’s capacity of being able to pay back a loan. The specific number ranges from 300 to 850, with 850 being the highest possible credit score. Typically, individuals with higher credit scores receive lower interest rates. If you have a higher credit score, it shows that you are creditworthy.
What Should My Credit Score Be?
If you are planning to buy a new car, you should have an average credit score of at least 714. On the other hand, if you want to settle on a used vehicle, a credit score of 655 will suffice. The credit score standing of individuals can be classified into five categories. If your credit score is in the “Super-Prime” category, it means that you have excellent credit status. Lenders and creditors will not see you as a risk and will give you the best possible offers. In the “Prime” category, individuals are still seen to have a very good credit status despite falling a range down from the super prime category.
|Credit Score||Interest Rates|
for New Car Loan
for Used Car Loan
“Non-Prime” borrowers are those who have weak or no credit histories or limited payment capabilities. They may still get a loan offer but possibly have a higher interest rate compared to the previous categories. If you have a low credit rating, high debt levels or records of bankruptcy, delinquency or defaults, your credit score can be in the “Subprime” category.
Interest rates can also be high if your credit score is subprime. Lastly, the “Deep Subprime” category shows that an individual has a credit score of 500 or less. People in this category have often experienced loan rejections from car dealerships, banks or credit unions.
A deep subprime borrower may still be able to receive an auto loan, however, he/she may have to endure higher interest rates. Moreover, individuals with deep subprime credit don’t have the means to purchase a new car. This is because a high price tag makes it difficult for them to repay the loan. In the 1st Quarter of 2017, the average car loan rates are as follows:
What To Do If You Have a Bad Credit Score?
A bad credit score may be a result of not having sufficient years of credit history, late payments or identity theft. Naturally, individuals with low credit scores end up getting higher interest rates. Nevertheless, you don’t have to go through this just because of a low credit score. For you to get a fair loan, here are some steps you can follow:
Access your situation
Ask yourself. Is it really that important to purchase a car now? Assess your current situation. Maybe you can take public transportation instead while you work on rebuilding your credit score. To help you build credit, you may want to get a secured card. This card is considered a great first step for those who have a poor credit score. It operates based on a cash collateral deposit.
No matter how much amount you put in as a security deposit, this particular amount becomes your credit limit. You may use this card responsibly for 6 months up to a year to raise your credit score. Another way of boosting your credit score is working with credit repair companies. They can also help you get rid of any error on your credit should there be any. Purchasing a car with bad credit is only recommended in certain emergency situations.
Check your credit report
No matter what your credit score is, you have the right to double check your credit report every twelve months. In this way, you may be able to verify what particular activity has affected your credit score and determine any discrepancies should there be any. You can even bring your credit report while negotiating with potential lenders. This can serve as a proof while you explain your side regarding the negative side of your credit report. Depending on your reason, lenders may actually work with you to give you a reasonable interest rate amount.
There are many lenders in the market. Each one of them has a unique requirement when it comes to lending. If your credit score is considered low by one lender, do not give up. Do your research and go ask another lender. Check out first with other lenders the value they are willing to give you for your credit. In addition, you may want to search for the lender’s auto lending rate sheet to find out what are the latest rates for the new and used vehicles depending on your credit score. You can use this information as you negotiate with a lender.
Try to limit your search time frame to two weeks
Lenders checking your credit score can actually have an impact on your credit score. Nonetheless, scoring models count credit inquiry made within two weeks for just one inquiry. That is why, if you are actually shopping around lenders in the market, you have to be prepared to choose a lender within the two-week time frame.
Choose a shorter loan period
When deciding on a loan period, focus on the interest rate. While longer loan term period may offer lower monthly payments, sometimes, shorter loan term period can give you a lower interest rate. This will not only lead to a lesser amount of payments but also cut off extra years in paying.
Go for a new car
Because you have a poor credit score, your first instinct may tell you to settle for a used car instead. However, older vehicles can charge higher interest rates than newer ones. New cars, and even newer used cars can be a better option since they have the potential to offer the best financing. Before making a decision, it’s still best to check out all available deals. If you can find a used vehicle for sale that is within your budget, then you may eliminate the idea of applying for an auto loan in the first place.
Ask someone to be your cosigner
If you have bad credit, a variable income, a high debt-to-income ratio loan qualification requirement or an income lower than the required amount for an auto loan, then your best option available is to get a cosigner. But be sure that you will be able to make your payments in a complete and timely manner.
A cosigner will be responsible for paying on your behalf if you are unable to fulfill your loan obligations. You don’t want to have any troubles with your cosigner, most especially if that person is someone you value. Furthermore, having a cosigner on your car loan can help raise your credit score, provided that you are successful in paying your auto loan.
Are There Other Factors Lenders Consider?
Individuals with excellent credit score can easily get lower interest rates on auto loans. Some can even get a 0% interest rate depending on the situation. On the other hand, borrowers with terrible credit scores can end up with interest rates as high as 20% to 30%. Individuals planning to buy a car but have bad credit can spend a lot more compared with those who have good credit.
Like any other person lending money, you want to be assured that you will get the money back. The same goes with lending companies in the market. They choose to put their trust on people who have good credit scores because they believe these people will eventually pay them back on time. If an individual applying for a car loan has missed payments, defaulted loans or high debt-to-income ratio on their credit history, these pose as a red flag for the lenders.
If the lenders feel that they can fully trust the person for a loan, they put on a high-interest rate or worse not approve the application. Aside from your credit history, here are the other factors that lenders consider:
If you have a long-term employment history, it can mean that you are stable and dependable when it comes to your finances. If you are still in the process of looking for a job and has a poor credit score, it can send bad signals to lenders. Lenders also check your income – if you are capable of paying the entire loan along with its interest rates in the long run.
Lenders are more likely to approve your car loan application if you can pay at least 25% of the total cost as a down payment, even if your credit score is not that good. The more money you can pay as down payment, the less your credit score will matter to the lenders. Also, this will reduce your monthly payments and Annual Percentage Rate (APR).
If you suspect lenders are having second thoughts on giving you the loan you need, you can offer them a good explanation. Elaborate the details as to why you have a lower credit score. Lenders will know if you really have a reasonable explanation or you’re just making an excuse.
Where to Apply for a Car Loan?
There are many lenders in the market. Knowing this, the smart thing to do is to check what each lender offers and from there determine the best financing offer for yourself. Whether it is your first time purchasing a car or you are planning to buy another one, you should review all your auto financing options first. It is important that you get a valuable deal at a price you can actually afford. Several sources from where you can apply for an auto loan include credit unions, finance companies, large national banks, small community banks, car dealerships, Dealer Financial Services Group (DFSG) and finance companies. Here are some of the companies you might want to check out:
- Consumers Credit Union
- Innovative Funding Services
- rate Genius
- openroad Lending
It doesn’t matter whether you’re planning to purchase a new or old car. Before getting too excited, you have to take your time and plan things because buying a car is a major investment. Be thoroughly prepared. Show your potential lenders that you are responsible enough to pay bills and maintain a good credit standing.
Comparing the Different Loan Offers You Have
After comparing lenders, the next step you need to take is choose the financing offer that is most suitable for you. Do not base your selection on the low monthly rate alone. Consider the total cost of the car you want to buy along with the amount of interest you’ll pay over the duration of the loan. A car loan calculator will be very helpful in this situation. In the calculator, enter the number of months you’ll pay the loan, your interest rate and the amount that you are financing.
This will show you the interest rate you are required to pay and the monthly payment. Finally, multiply the monthly payment by the number of months in the loan, and add your down payment to find the total cost of the car you want to buy (not including taxes or fees). Some car loan calculators available online may have rounding errors. As a result, the numbers they show may not resemble the data in your loan documents, although the numbers should not be far from what the documents disclose.
Getting Pre-Approved for a Car Loan
There are many ways available on how to apply for a pre-approved car loan. You can either do it in person, over the phone or simply by logging online from your computer or smartphone. The lender will then perform a hard credit check to determine your credit history. They will also gather all your personal details such as your monthly income.
These variables will be the basis of the lender if whether or not your car loan application is worthy to be approved. The accumulated information will also be a deciding factor as to how much your interest rate, monthly payment and loan amount will be. Furthermore, this will determine the length of the loan. When everything else goes smoothly, the lender will give you an offer statement, either in a letter or certificate format. You can bring this statement to the car dealership you have been eyeing at and proceed with purchasing your automobile.
My Auto Loan Application Is Declined. What to Do?
Rejections can happen in any situation, and loan application is not an exception. There are many possible reasons as to why your loan application is denied. The lender is legally required to disclose that said information to you.
No matter what the reasons are, you can use this to help re-evaluate your financial situation. As tempting as it may sound, avoid buying cars from dealerships offering a “buy here pay here” deals. If you are rejected by a large national bank or online lender, widen your options by discussing your auto loan needs with a community bank or smaller credit union.
These financial institutions have people who are available to listen to your financial story. If they cannot give you your target loan amount, they can at least offer counseling and help you come up with a plan as you move forward. Fortunately, there are lenders that offer “second-chance” programs that help individuals with problems in finding financing options and improving their credit scores.