Vehicle Loan: How Credit Score Affects It

Purchasing a new vehicle can be an overwhelming experience. The intricacies of financing only add to the stress. But it doesn’t have to be that way. We’ve compiled some information designed to lead you into the auto finance process feeling informed and prepared, regardless of your credit history.

How Does Credit Score Affect Vehicle Financing?

Your credit score is designed to tell a potential lender– in this case someone granting you a vehicle loan– about the way you have handled various credit factors in the past.

Let’s start by covering some of the different factors that make up your score.

Payment history: Are you making your payments on time? This accounts for about 35% of your credit score, making it the most important factor.

Credit utilization: How much of your available credit are you using? The best utilization rate will vary but– in the simplest terms– you want to be using a small percentage of the credit you actually have available to you.

Length of credit history: How long have you had established credit with on-time payments?

Credit mix: Are you successfully handling different types of credit simultaneously? (For example: You have a credit card and a home loan.)

Now back to how this affects your vehicle financing:
People with the highest credit scores show favorable behavior in all of the categories above. In other words, they have a long credit history, make payments on time, and are using just a small percentage of their available credit.

When they apply for a car loan, the lender knows all this from their high credit score and is more likely to offer a lower interest rate because they are at lower risk for missing payments or defaulting on their loan.

Why Vehicle Interest Rates Are Important: Does a Good Credit Score Lower My Car Payments?

The amount you will pay over the lifetime of your auto loan is affected by 3 main things:

The Principal: The amount you borrow; How expensive is the vehicle you are purchasing?

The Term: Amount of time you have agreed to take to pay off the loan and interest in full.

The Interest Rate: Added charges to the lender over time, on top of the principal loan

As described above, a good credit score is likely to lower your interest rate. This means significantly less money paid over the lifetime of the loan. Here are some examples:

A buyer might have the option to lengthen the term of the loan– meaning lower monthly payments– if interest rates are lower, with far less added overall cost.

Alternatively, with lower interest added over the lifetime of the loan, the buyer might be able to afford to shorten the term and pay off the loan faster.

Can I Get a Vehicle Loan with a Bad Credit Score?

There is good news for those with less than perfect credit. There can be a great deal of variation in credit scores from different sources. According to Consumer Reports, “Depending on who is pulling a score on you, your credit history may generate more than 60 different scores.” So, if you are turned down by one lender, don’t be discouraged from applying for a loan elsewhere.

Credit score isn’t the only deciding factor in a lending decision, either. Many lenders consider your income and work history alongside credit score. The amount of your down payment can also drastically change the likelihood of credit approval.

A lender is also going to decide based upon their own needs. Some lenders specialize in subprime loans and may be eager to work with you, despite a lower credit score.
Perhaps the best news is that credit scores are forever changing and there are a variety of steps to take to improve your credit score.

How to Improve a Bad Credit Score

These simple steps can be taken to improve your credit and put you in the best position when you are ready to finance your new vehicle.

  • Request copies of your credit report. Ideally, request copies from all three major bureaus (Equifax, TransUnion, and Experian). Awareness of your score and what is affecting it is step one.
  • Review your credit report! Errors happen all the time and can affect your credit score in a big way. If you find an issue, you can file a dispute which must be investigated and resolved by the credit bureau.
  • Pay your bills on time. Consider signing up for auto pay. This ensures the minimum is paid each month with no extra work from you.
  • Pay down any credit card balances. This can be a quick path to improving credit utilization scores (discussed above).
  • If you can’t pay down credit cards, consider a debt consolidation loan. Use the loan to pay down your cards.

Credit Score Ranges: What Should Yours Be Before Applying for Vehicle Financing?

Have you requested your credit score but aren’t sure what it means? You aren’t alone. To better understand credit scores and how yours ranks, let’s look at some examples.

VantageScore is the system most likely used when you check your own credit score. Vantage scores range from 300-850. Scores of 660 and above put you in the Good Credit category. VantageScore tends to examine more data over a longer period and don’t tend to change as quickly.

FICO scores are the most frequently used by private lenders, and therefore the most likely to be used in decisions about auto financing. Fico scores range from 300-850 as well. A higher score is better and usually 670 or above is considered Good Credit. FICO scores tend to be more of a snapshot of your credit at a given time and can change more quickly than VantageScores.

So, what is a good credit score for a car loan? The short answer is that there is no one-size-fits-all solution when it comes to financing. Having a good credit score does not guarantee loan approval and having a bad credit score doesn’t mean you can’t find a loan that works for you.

Use the steps above to guide and inform you. When you are ready, consider reaching out to a professional in the automotive industry such as those at BraunAbility and our trusted partners. We’re here to help you find the best fit vehicle and financing.

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