A car is considered a must-have for most people. According to the U.S. Department of Transportation, about 90% of American households own at least 1 vehicle that they use almost every day. Most car owners will upgrade to a new one at least every 4 to 5 years.
When you approach a car dealer, know that they want you to sell you a car by any means necessary. However, before you can get started with the paperwork, all car shopping experiences start with your credit score.
Are You Qualified to Buy a Car?
While you may be able to drive any car you want off the lot, keep in mind that not all car deals are good deals. Your credit score remains the root of the terms attached to the type of car deal or auto loan you will be able to obtain. A good credit score would entitle you to competitive rates on the purchase, while higher credit scores will save you money due to lower interest rates. If your score falls below the minimum suggested score for a car purchase, expect a high interest, or worse not being approved at all.
What Is a Good Credit Score to Buy a Car?
According to Experian, the average credit score to buy a new car is 715, and 662 for used-cars. The minimum score required by most creditors for a car loan is 660; when you have this score you are considered to be a “prime borrower.”
Here is a table from Experian to help you understand how credit scores are categorized to determine the interest rate applied to your loan:
|Borrower Category||Credit Score||Interest Rate|
|Superprime||781 – 850||4.20 %|
|Prime||661 – 780||5.12 %|
|Nonprime||601 – 660||8.08 %|
|Subprime||500 – 600||12.42 %|
|Deep subprime||300 – 500||14.97 %|
Based on the simple chart above, you’ll see how low credit scores drive interest rates up. If you have a low credit score, applying a higher rate on your car loan is a way for creditors to manage your risk of credit default.
What Can Do If Your Credit Score is Low?
If you are eager to buy a car right now but are unaware of your credit score, it’s important to take that step of looking up your score first. You can do this by simply getting a free score status that is updated weekly. Whatever comes up in your free score will give you a rough idea of where you stand in terms of approval and interest rate.
Don’t be disheartened just yet if you find you have a low credit score. There are still ways you can try for a lower interest rate than your score projects.
Show Proof of Timely Payments
Creditors take great consideration of your payment history on your other loans and bills. If you have a low credit score, your payment history is the next area creditors would look into. If you have existing loans and bills that you never miss to pay on time, then present your documents as proof of that.
Show Proof of Your Good Credit Mix
Creditors for car loans also take a look at how you manage multiple types of credit. A mix of installment credits and revolving credit may earn you a nod with these creditors.
Talk to Car Dealers That Can Help you with Special Arrangements
Even if many lenders use a specific credit scoring model, there are also lots of lenders that would be willing to help you with special arrangements. Many lenders will beyond a credit score; they also consider the borrower’s debt-to-income ratio, full credit history, and your equity amount upon application.
Hire a Professional
When your credit score is a bit challenging to repair by yourself and you have an immediate need to purchase a car, then a personal financial planner may be able to come up with good options for you.
Settle for a High-interest Rate on Your Car Loan and Refinance as Soon as you Can
In the absence of better financial options for your car loan, you may settle for a higher rate then refinance as soon as some of your other loans are paid off. By paying off old debts, you can easily raise your credit score. By the time you refinance your high-rated car loan, you’d be eligible to bargain for a lower rate.
Wait it Out
While your need to have a car may be important, pursuing a loan that goes beyond your budget will do you more harm than good. Consider other means of resolving your transportation issues while you wait until you’re financially stable with a good credit score.
How to Improve Your Credit Score?
It takes effort and discipline to build a good credit score and then maintain that score. However, knowing how it affects your chances of being granted credit, you’ll be forced to do your part.
Stop Making Unnecessary Cash or Credit Spending
You need as much cash to pay off your loans so try to stay away from buying things that aren’t essential. Also, you should stay away from running up your credit cards as you try to pay back your debts.
Pay Your Bills on Time
Bills paid on time builds a good payment history as explained earlier. Creditors give special consideration to good payment history even if you have a low credit score.
Keep Your Credit Card Balances to 30% of Your Total Credit Limit
To creditors, this is a safe number that shows you’re a disciplined spender.
Space Out Your Loans at Least 6 Months Apart
Spacing your loans out 6 months apart is a good enough time to work on your current credit score to make it better. This also helps, you avoid being overwhelmed with paying multiple loans monthly.
Keep Old Credit Cards Open
Old credit cards show a good amount of credit history on record. However, it is important to make sure you don’t have any overdue balances on these accounts.
Buying a car, whether new or used, is an exciting thing. But before you get ahead of your plans, consider ensuring a good credit score first because this sets the foundation on how creditors will treat your loan application. The higher your credit score, the more likely you’ll be granted a good rate on your loan, helping you stay on your budget.