• How Your Credit Score Affects Auto Loans

    When reviweing applications for auto loans, lenders order copies of your personal credit reports from the three major credit reporting agencies: Equifax, Experian and TransUnion. In fact, the consideration of the credit score contained in the reports is one the most important steps of the loan process, and everything associated with the loan application from that point on will be determined by how high, or how low that score is. Here are some ways that your credit score will affect a car loan:

    Approval or Rejection

    Although there are now lenders that can provide car loans for buyers with almost every level of credit score, there are still some situations where too low of a score will keep a potential borrower from being approved for a car loan.

    Lenders use a FICO credit scoring system that is used by the 3 reporting agencies that ranges from 350 – 850. In most cases, consumers with credit scores less than 500 will find it very hard to finance a vehicle.

    FICO scores are determined base on past credit experiences you have had and are calculated using formulas which take into account how well you have met past payment obligations. The better you have been about making payments and meeting your credit obligations, the higher your score. On the other hand, if you have late payments or fail to pay off balances, your score declines.

    Interest Rates

    Your credit score will dictate the car loan rate you are offered by a lender. Lenders offer lower interest rates to customers with higher credit scores and higher rates to borrowers who have demonstrated a failure to always meet their obligations on time and have lower scores.

    If you want to know how much a credit score can affect rates, consider this: people with credit scores above 700 may qualify for certain car loans with a 0% interest rate and will always be offered the best car loan terms. In contrast, people with scores lower than 600 may find it hard to get a car loan interest rate lower than 10 – 15 percent.

    An interest rate difference of only a couple of points can result in thousands of dollars in additional finance charges on a 6 or 7 year car loan. Interest rates are a big deal when buying a car, and good credit scores get the lowest ones.

    Monthly Payments

    Because credit scores affect the interest rate you will be charged on a car loan, they also directly affect the amount of your monthly car payments. The higher the level of interest you are required pay for an auto loan, the higher your monthly car payment will be. The same one or two point difference in an interest rate that can cost you thousands of dollars over the life of a loan will also increase your monthly car payment by as much as $100-$200 per month.

    When thinking of your credit score from the perspective of how it affects a monthly car payment, you can easily see how a lower score can affect you every month you are making payments on a vehicle.

    Down Payments

    Customers with good or excellent credit and high credit scores can almost always purchase a new or used vehicle with little or no down payment. However, consumers with lower credit scores will almost always be required to provide some amount of down payment. For borrowers with particularly low credit scores, the customer may be required to come up with thousands of dollars before the lender will approve them for a car loan.