What Credit Score Is Required to Buy a Car?
Credit scores greatly impact your car financing efforts. Although a bad credit score won’t stop you from getting a car loan, your loan terms and interest rates will be greatly affected. The lower your credit score is, the lesser the possible lenders and the higher you’ll likely pay in interest.
According to the credit reporting bureau Experian, the average credit score is 717 for new auto loans and 661 for used car financing in the third quarter of 2018.
Car Loan Availability
Generally, if your credit score is high, you will have a wide pool of lenders who are ready to give you the money. Your impressive rating will also make it easier to borrow large amounts of money and negotiate for favourable rates.
The opposite is true if you have a low credit score of 680 or below. Lenders will likely deny your application. They believe that you’ll have a hard time with the repayments and are likely to default on your debt.
Experian reports that only 38.3% of borrowers with credit scores of 660 or lower were approved for car loans in Q3 2018.
Car Loan Rates
A high credit score of 700 and above will make it easy for you to get approved for car loans with a low interest. Within this range, you will only pay around 5% interest rate.
As your credit score plummets, the interest rate will rise up. When it plunges down to 500 or lower, your interest will be around 15% or higher.
Experian reveals that the average loan interest rates in Q3 2018 for borrowers with credit scores above 660 are 3.68% to 4.56% for new cars and 4.34% to 5.97% for used vehicles. Meanwhile, those with scores of 660 or lower pay 7.52% to 14.41% for new vehicles and 10.34% to 18.98% for used cars.
These few extra percentage points are not a big deal, you say? Apply that percentage to the thousands of dollars on your car loan and prepare to be staggered by the difference.
What Should You Do If Your Credit Score is Low
If your credit score falls below 700, you may need to explain your financial circumstance to your lender. Prepare for the possible questions, especially about the negative items on your credit record. Did you make late payments? Explain how they happened.
If you’re employed, present your pay slips, proof of residence, utility bills in your name, and proof of current full-coverage auto insurance if you have one. Show all records that you’ve been paying bills on time for the past six to eight months. This will help convince the lender that you’ve overcome your debt issues.
Before shopping for car loans or applying for one, get a copy of your credit report at least 3-6 months in advance. This will give you more time to check and dispute errors and to improve your poor credit rating.
Your credit score is greatly influenced by your recent financial transactions, especially your debt commitments, payment history and account balances. Work on them by making on-time debt and bills repayments and managing your finances smartly. You will see your credit score improves in no time.
Continue improving your credit scores even after your car purchase. This will allow you to refinance your auto loan for a lower interest rate in the future.
Bad Credit Car Loan
If you need a car now, get a bad credit car loan. Also called the subprime auto loan, this type of car financing generally requires a large down payment and collateral. It also comes with higher interest rates.
You may also need the help of a co-signer who will vouch for your creditworthiness and will take the responsibility of repaying the loan if you are unable to do so. When you refinance, you can remove the co-signer from your new loan contract.
Before applying for a bad credit car loan, save up for a down payment of around 25% of the total loan amount. Paying this upfront will help you pay less interest.
There is no universal minimum credit score required for a car loan, but a high score will increase your odds for approval and favourable loan terms and rates. If you have a low credit score, focus on improving it first before applying for a car loan. If you get approved, make your repayments on time. This will boost your credit rating, helping you get back on the road to better financing terms.
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