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While a minimum universal credit score is not required when applying for a car loan, your score can significantly affect your ability to purchase a loan and your car financing terms.Lower credit scores can result in fewer offers and higher interest rates. But that doesn’t mean you should throw in the towel if your credit score isn’t what you’d like. According to a report from the State of the Automotive Finance Market by Experian, people who got a new car loan during the second quarter of 2020 had an average credit score of 718 points, while those who got a used car loan had an average credit score of 718. average credit score of 657 points. Read on and learn how your credit score affects your chances of getting an auto loan, and the ways you can increase your chances of approval and receive better offers.
How do my credit scores affect my car loan?Your credit scores can affect your ability to obtain a car loan, as well as the interest rate and terms they can offer you. Before looking for auto loans, it’s generally a good idea to check your credit scores to understand how they can influence the terms used by new and used car lenders. This is also an opportunity to look for errors on your credit reports, as these could lower your credit score.
Car loan rates by credit scoreThe table below shows the average new and used car loan rate based on credit scores, based on data from Experian for the second quarter of 2020.
|Very high risk (300–500)||High risk (500–600)||Risk (600–660)||Low risk (661–780)||Very low risk (781–850)|
- Let’s say two borrowers (one “low risk” and one “high risk”) want to finance $ 10,000 for a used car. Both have a loan term of 60 months.
- The “high risk” borrower is offered a rate of 17.78%, that is, the average for borrowers in this range in the second quarter of 2020 according to Experian. Instead, the “low risk” borrower is offered an average rate of 6.05%.
- Over time, the “high risk” borrower will pay $ 15,164 or $ 5,164 in interest. Instead, the “low risk” borrower will pay about $ 1,614 in interest for a total cost of $ 11,614. This is a $ 3,550 difference in interest paid, and in this case, it was all due to credit scores!
Ways to increase your likelihood of approval and receive a better interest rateIf you plan to buy a new car now or in the near future, there are steps you can take to increase your chance of getting approved for a loan or qualifying for a lower interest rate with more favorable terms.
Improve your credit scoresThe better your credit scores could result in lower interest rates and more lenders prior approvals. Your scores largely depend on paying your bills on time and how much debt you have. Focusing on these two important factors could go a long way toward improving your credit.
Save for a down paymentMaking a down payment could increase your chances of getting approved for a car loan and may result in a lower rate. Also, paying more upfront will decrease the amount you need to borrow, which can mean paying less interest overall.
Consider having an endorsementHaving a co-signer or co-signer with higher credit scores can help you get your auto loan approved more easily – or get a better interest rate.
Keep lookingIf you haven’t found a loan rate and terms that suit your needs, don’t be discouraged and keep looking. At Credit Karma we can help you by showing the estimated term of your loan, the interest rate and the monthly payments that some lenders offer.
What credit score is used for car loans?The FICO and VantageScore credit scoring models are the most commonly used for auto loans, although lenders also often use auto industry-specific scores — known as FICO® Auto Scores. To calculate FICO® Auto Scores, FICO first calculates your “base” scores (that is, your traditional FICO scores), then adjusts the calculation based on the specific risks of the car. These scores help lenders determine how likely you are to make your loan payments on time. FICO scores for cars range from 250 to 900 points.
What are the factors that make up my credit scores?Regardless of the model, there are a few key factors to higher credit scores . The following tables show which factors make up the two most popular credit scoring models: FICO® 8 and VantageScore® 3.0.
Payment historyBanks want you to pay back the borrowed money. Therefore, your payment history , that is, the number of payments you have made in time to pay off loans or credit cards, is one of the factors that most affects your credit score. Being late on your payments can cause your payment history to be less than 100%, which could hurt your score.
Use of your creditCredit utilization is a way to calculate how much of your total available credit you are using. Generally, it is best to keep total utilization as low as possible; most experts suggest keeping it below 30%.
Age of your accountsThe length of your credit history indicates how long you have had credit cards or other loans. The older the average of your accounts, the more that age will help you with your credit score. Keep in mind that having multiple new accounts may not benefit your score because it will lower the average age of your accounts.
Account CombinationYour account mix, or the types of credit accounts you have, can be a factor in determining your credit score. Lenders generally like to see that you have a history of on-time payments on a variety of credit accounts, not just one. Therefore, a combination of credit cards and other loans (such as car loans, student loans, or mortgages) can help you increase your credit score.
Credit checksThe checks credit hard and soft occur when you apply for credit, or even when you install a public service or rent an apartment. Hard checks (that is, checks that affect your credit score) typically stay on your credit reports for two years. So if you have a lot of hard checks in a short period of time, your scores may go down because lenders might see you as a borrower looking for credit.
Next stepsNow that you know a little more about how your credit scores can affect your chances of getting an auto loan, it’s time to apply your knowledge. To do this, consider the following points:
- First, check your credit reports and scores to get an idea of how they affect your credit. You can periodically obtain a free copy of your credit reports from the three major credit bureaus. Remember that through Credit Karma you can check your Equifax and TransUnion credit reports at any time.
- If you can wait a bit to buy a new vehicle, make a plan to work on your risk areas – those that make your credit scores lower than you’d like.
- But if you need to get a car as soon as possible, be sure to search and compare offers from different lenders – such as banks, credit unions, and online lenders – so you can find the best rates and terms for you.
- Finally, after purchasing a car, we recommend that you continue to work on your credit score. Remember that improving your credit could allow you to refinance your car loan for a lower interest rate in the future.
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