Owning a car isn’t just a luxury if you are like most people. It’s a necessity to get you to work, take care of your family, and juggle the big to-do list you have to complete every day. It’s a considerable investment when it is time to purchase a vehicle.
If you don’t have enough money to pay in full for a car at the time of purchase, you’re going to need a loan. It’s important to understand why your credit score will have a major impact on financing a vehicle.
Your credit score isn’t only used for helping you to get a car loan. Lenders will take your score into consideration if you are buying a house, getting a personal loan, or applying for a credit card. If your score is too low, you may be denied a loan altogether.
Otherwise, you can expect to pay a higher interest rate when applying for a loan. In contrast, a high credit score will mean better loan terms.
When you are ready to apply for a car loan, your FICO score will be one of the top factors that will be taken into consideration for loan approval. Your income and employment status, such as how long you have been working for your employer, also play a role in your loan terms.
A loan score of at least 661 is ideal for a better interest rate. If your score is any lower, expect to pay more in the long run. A higher interest rate bumps up your payment. A larger payment may mean you need to extend the length of your loan by as much as seven years to pay off your car.
A high credit score can give you the royal carpet treatment with lenders. Many auto dealerships that represent the major makes and models may offer you 0% interest on your auto loan. Dropping your interest rate to zero may make it possible for you to pay off your loan in less than five years.
Your dealership may also give you a better price for the car if you are an excellent candidate for financing. A credit score in the range of 750 to 800 is considered very good. If you manage to have a score that is 800 or above, you’ll be able to afford more cars for your money.
If your credit score is low, especially below 600, it will be much more difficult to get a loan you can afford. You may have an interest rate as high as 16%. The amount approved for your loan may be lower, limiting you to a smaller selection of cars.
In many cases, a new car may not be affordable. Your low credit score may force you to get a used car. A buy here, pay here arrangement may be the only route you think is possible, forcing you to set up payment arrangements at a small dealership where you are having money drawn out of your account on a bi-weekly basis.
Regardless of what kind of credit you have, you should do your research about the best way to get a car loan. You can work with your credit union or regular bank in order to get preapproved before you start shopping.
You may get better loan terms and interest rates. Even if you don’t go with your preapproved loan, it will give you negotiating power with your auto dealer. Be sure to check out lenders that specialize in providing consumers with car loans. You may find more flexibility even if your credit score is lower.
Earning a good credit score should be a priority when you want to take out a car loan. Make sure you pay your credit cards on time. Don’t use the full amount of your credit limit. You should also pay more than the minimum.
If you don’t have any credit yet, take out one or two credit cards to start building a solid credit history. Setting aside money for a down payment can also help you to get the car you want. Having some financial savvy will pay off and give you good spending power over the years.