Many factors are considered when applying for a car loan, but one of the most important is your credit score.
Understanding how your credit score impacts your car loan may help you when applying for a car loan, to ensure you get the right loan and the best rates.
What is a credit score?
When you apply for a car loan, your credit score is something that will be looked at by lenders. A credit report details information about your borrowing history. This includes types of credit products, repayment history, length of credit history, and loan applications. All these elements determine your credit score.
Your credit score tells potential lenders how reliable you may be as a borrower. The higher your score, the more reliable you will be perceived. The average credit score is 500-700. Scores higher than 700 are more likely to benefit from the best rates on finance, while if your score is lower than 500 you may be considered riskier by lenders.
A key benefit to having a better credit score is that you’ll likely have more flexibility when it comes to financing options and choosing the right car loan for your needs and budget.
Checking your credit
Lenders can be cautious, they want to get an idea of your reliability as a borrower to ensure you will pay back the loan on time. This is why when you apply for a car loan, they’ll check your credit rating.
Your credit score can be proof of a good (or bad) repayment history. You may be more likely to get approved for a bigger loan amount if the lender sees you have a strong credit rating.
It’s worth knowing that when a lender performs a credit check this will leave what’s known as a ‘hard inquiry’ on your report, this can impact your credit score which is why it’s not recommended to submit multiple credit applications within a short period or have numerous lenders checking your credit score.
Make sure you understand the eligibility criteria involved with vehicle finance and ensure you meet the minimum requirements before applying for a loan to avoid unnecessary credit checks.
Paying interest on your car loan
Your credit score is a key factor in determining the interest rates you pay on your car loan, and make no mistake, interest has a big impact on your car loan.
Interest rates can add significantly to the overall amount you end up paying on your car loan. Paying interest is unavoidable, however, it’s in your best interest to get the best rate you can as it will save you a lot of money in the long term.
The interest rate on your car loan can be determined by multiple factors, including the total of your car loan, the length of your car loan and your circumstances as a borrower, like credit rating.
The better the credit score, the lower the risk to the lender as they assume you’re more likely to repay the loan on time. As a result, you’re more likely to receive access to better interest rates on your car loan.
Before applying for a car loan, you can use a car loan calculator as a guide for what your repayment amounts and interest may be, based on the loan amount and term. Though, remember that this may not be entirely accurate, as it will not be able to take into account your credit score.
A finance specialist will be able to give you more accurate information about loan rates and your borrowing power, so it’s always important to get expert advice before applying for a loan.
How your car loan affects your credit score
While your credit score can impact your car loan rates, your car loan can also impact your credit score.
Keeping up with your car loan repayments can help improve your credit rating, while late or missed payments will negatively impact your credit score.
This is worth knowing as if you have a bad credit rating when you initially apply for a car loan and get hit with higher rates, if you manage to keep up with your repayments for a few years, you may then be in a position to refinance your car loan, and potentially get a better interest rate on your car loan at a later date.
Applying for a car loan if you have bad credit
You can still get approved for a car loan if you have bad credit, however, there are a few important things to understand first.
Lenders look at credit history when you apply for a loan and if you have a bad credit score you may be considered a risk. This may limit your car loan options and you’re more likely to pay higher interest rates, however, you can still qualify for car loans, as different lenders have different loan requirements.
You may want to decide whether you would be better off working on improving your credit score before you apply for a car loan. In some cases, it may be worth waiting until your score is higher.
Credit rating is just one-factor lenders take into account. The better your credit score the easier it may be to get the financing you need, however, even if you don’t have a great credit score, there are still many options available to you.
To talk with a finance specialist about your car loan options, contact the team at 360 Finance.