Purchasing a new car is a major expense that everyone can’t always afford in one lump sum. Many people take out a loan to help finance their purchase. However, just because you’re in need of a car, that doesn’t mean you’ll automatically be approved for the financing that you may require. By educating yourself on how your credit report and credit score can play a role in your financing options beforehand, you can avoid surprises and be realistic about your options for an auto loan and its relative interest rate.
There’s not one single number across all auto lenders that serves as a threshold to be approved for a car loan, in part because your credit score isn’t the only factor used in determining your approval. However, according to Edmunds.com, you’re going to have a harder time if your credit score falls below 620, because at that point you’re considered a “subprime” borrower. You might still be able to get a loan, but you’ll likely need to pay a higher interest rate and might also be required to pay a higher down payment to show that you’re still a good credit investment for the lender.
Impact of Higher Scores
Don’t be content to have just the bare minimum credit score necessary to get approved for an auto loan: as your score increases, the interest rate you pay on your car loan could decrease. This could save you hundreds or even thousands in interest over the life of the loan. For example, as of late 2013, according to Cars Direct, a person with a credit score above 740 would receive, on average, a 3.2 percent interest rate.
Checking Your Credit Ahead of Time
Before you go to apply for a car loan, Edmunds.com recommends checking your credit report. This allows you to see what your report consists of, so you can ensure that all your best credit behaviors are being reported. In addition, if you check your credit score ahead of time, you may get a better idea of what the interest rate on your loan might be, so you can set a better and more realistic budget for your total loan amount.
Applying for Auto Loans
When you’re ready to apply for an auto loan, doing your loan shopping in a short period of time can help you minimize the impact of the loan inquiries that are placed on your credit report. According to Experian, most credit scoring formulas count all inquiries for auto loans within a relatively brief period of time, generally 14 days, as just one inquiry when calculating your credit score. That way, as long as you do all your car loan applications within two weeks, your credit score should be affected by only one inquiry, no matter how many banks or other lenders you explore within that period for that purpose.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.