Everyone fully knows that purchasing a car costs a hefty sum of money. But little to no people are aware of how credit scores affect car loans. Affording and buying a new ride requires financial help, usually as auto loans from lenders. Often, the added interest rate costs us thousands of extra dollars. It is what restrains people from getting a new vehicle.
Do you know what determines the interest rate that we have to pay? Our credit score. Let’s learn about how credit scores affect car loans.
What Is a Credit Score?
Before getting into further details, let’s discuss what credit score is. Your credit score consists of three digits, which gives the loan lender an idea about your credit score management and loan repayment ability. There are most reliable and accurate consumer credit reporting bureaus, TransUnion, Equifax, and Experian. They give information about your financing and payment history and generate your credit score as well.
What Do Lenders Search for in a Credit Score?
Let’s cut to the chase: they want to get back their money. The dealer, bank, or credit union loves to assess the possibility that you will be able to pay them back or not. They complete this assessment by investigating your credit history and recent finances. A monthly credit report and any current monthly payment plans give them this information. The following five fundamental components comprise your credit balance. And each of them has separate assigned weights.
- Payment History (35%)
It gives an account of how you have kept up with your monthly payments, previous loans, and credit card payments. Although, bankruptcy, a mortgage default, and late or undone payments drastically affect a section of your credit score. And make it hit rock bottom. However, you can work towards making your credit score better by paying off lower balances.
- Outstanding Debt (30%)
As the name suggests, having fewer debts results in higher chances of getting credit. As we all know, the more debts you owe, it would be much of a hassle to pay off everything at once. This debt assessment is also referred to as “credit utilization score” Ideally, try expending less than 30% of your total credit.
- Length of Credit History (14%)
Having a long track of credit history proves to be very beneficial for your credit rating. But it is difficult to gain such lengthy credit history when you are only in your early twenties. It is the reason why older people tend to have a much better credit score.
The frequency of credit use also matters. Try to use your credit often. It displays how well you can handle the debts and puts a good impression on the auto-loan lender.
- Account Age (10%)
Having a longstanding and excellent credit history on each of your accounts affects your credit score greatly. But, opening many new credit cards shortly after each other lowers your overall FICO score. The lenders often wonder about your ability to pay the debt, so you avoid doing so and establish a long-term account to earn the trust of auto-loan lenders.
· Types of credit used (10%)
If I talk about a lender’s point of view, a variety of credit used is a good sign. The lender wants to get an idea about your abilities when it comes to handling several credits. Like student loans, auto loans, and credit used each month.
What Is a “Good” Credit Score for an Auto Loan?
Lenders do have the right to set their standards when judging a borrower’s FICO score. Experian says that “high scores represent better credit decisions and can make creditors more confident that you will repay your future debts as agreed.”
But you may still wonder, what’s the “good credit score”? 700 score is a must, meaning lenders prefer borrowers having a score about this number. Anything above 800 is more than enough. Once you get a credit score over 800, you can negotiate when deciding the annual percentage rate and loan term. Most borrowers in the USA have a credit score of 657.
How Does Credit Affect My Car Loan Rate?
Your interest rate varies widely, depending on your credit score. The better your credit score is, the lower the auto-loan interest rate you will get. It is a fact that a person with a bad credit score tends to pay 10% more points than an individual with a good credit score.
When a situation involves buying a car, your credit score matters a lot. Besides, it also affects the cost of interest that you have to pay each month. A stellar credit score gives an upper hand in every situation related to auto-loan and corresponding services. It favors millions of people, and you can be one of them as well.
For people who have a rough credit score, this can pose many problems. It can lead to many hazardous challenges in the future as well. But don’t despair! We have listed some ways to improve your bad credit score.
So, how credit scores affect car loans? It affects you in many ways! However, you can also escalate your credit score by neatly managing an auto loan. It adds benefits for you for future car, truck, or van purchases.
Now that you are well aware of all the facts and tips about auto-loan, you should get ready to buy your dream vehicle!