Your credit score is very important when shopping for an auto loan, as it's what lenders look to as a point of reference. Here is a breakdown of the typical interest rates you can expect with different credit scores:
- 850 - 740: Excellent credit score - 3.2% interest rate (on average)
- 739 - 680: Average credit score - 4.5% interest rate (on average)
- 680 and below: Sub-Prime credit score - 6.5 - 12.9% interest rate (on average) *
The credit score essentially paints a financial picture of a person, and helps determine the likelihood of them paying back the loan that was given to them. However, with a bad credit score, a person can expect to have a little rougher time on their hands. A lender looks at the credit score and other documentation, then determines whether a person is a good candidate to lend to. The credit score is probably the most important of all the documentation presented.
The Optimal Range for an Auto Loan Credit Score
In many cases, to be successfully approved for an auto loan with optimal rates, a person would want their credit score to be in the 740 range. For those who do not have the luxury of having such a credit score, something in the high 600's will work, but in most cases will warrant a high interest rate. This is obviously not the best option for anyone looking for a loan, but there are many things that a person can do to increase their credit score beforehand.
One of the best things a person can do to make sure that they are getting the loan they deserve is to check their credit score online. By doing this, they can know what to expect without having to spend the time and energy associated with finding out at the lender's office. Additionally, with a little research, one can find many things that they can do to really help them improve their credit score, which can open up many different opportunities for them.
Steps to Rebuilding Credit
There are many ways for a person to potentially rebuild their credit score once they find out that they need to. One of the simplest ways is to use credit cards sparingly. Another way to rebuild a credit score is to re-prioritize and start making all scheduled payments on time, and after a while of being a good customer, a lender may even issue a "goodwill adjustment", if requested in writing.
What to Expect with Variable Credit Levels
FICO scores range from 300-850. An excellent credit rating is one that's 720 or higher. Those that offer auto loans will consider a rating of 620 or lower to be "subprime". Therefore, a person looking for a decent auto loan should aim to have a credit score of 620 or higher.
What Credit Is
Credit is essentially a measure of how risky it would be for a lender to give you a loan. The higher your credit score, the less risk there is involved for the lender. Credit is mainly influenced by 5 factors, the most important of which is your payment-making history. If you have consistently made payments on time, you are more likely to have a good credit score. Alternatively, missing payments or continually making late payments will have a negative effect on your credit. Another important factor is your current debt. Having a large amount of debt will lower your credit score. The three less influential factors which have bearing on your credit are the period of time over which you have been accumulating credit; when your most recent credit application was; and whether you have revolving credit (credit cards, basically) or installment credit (mortgages and car loans, usually). Installment credit is more valuable than revolving credit.
CarsDirect Finance Services
If you're seeking car loans to pay for a car, you may consider getting a loan through CarsDirect. We help more credit-challenged consumers than other website in the country. We work with a network of dealers who specialize in this area of financing. The dealer has access to a number of financial institutions and will shop around to find you the best deal. Simply fill out a quick and easy application, and you'll be on your way to getting your new car. The service is free and absolutely no obligation is required.
Finding Your Credit Score
You can look up your credit score by having a car dealership run a credit check on you or by signing up for one of many available online credit check companies. If you choose the latter, be very careful to choose a website which is legitimate and not scamming for your personal information as sensitive information such as your social security number is required.
Ordering Your Credit Report
Every person in the United States is entitled to a free credit report from each of the 3 credit reporting agencies every year. You are also entitled to a free report if you have been turned down for credit or a job as a result of a credit report.
These agencies-Experian, TransUnion and Equifax-collect information that is reported about financial and credit activities on every person in the United States. However, it is estimated that approximately 25% of credit reports have numerous erroneous or incorrect information included. As a result, it is wise to check your credit report annually for accuracy.
If you anticipate that you will be applying for credit and have not received your free annual report, order your credit report for review. You can do this online at the website of any of the credit reporting agencies and there are also websites where you can order a report that contains information from all 3 agencies.
Correcting Errors for Your Auto Loan Credit Score
Since so many credit reports have errors and incorrect information on them, carefully review your credit report once you receive it. If you find incorrect information, you are entitled to challenge that entry. Incorrect entries can include items that were paid, accounts that were never opened, incorrect loan information and inaccurate address information.
To challenge an entry, write a letter to the credit reporting agency. Include your relevant information (name, address, social security number, date of birth) and the information that is incorrect. If you have proof to back up your challenge, include copies (checks, payment agreements, etc). Credit reporting agencies are required to conduct an investigation and correct the entry within 30 days. You are allowed another free credit report to check to verify that the entry was corrected or removed. However, it may require challenging an entry several times before it is corrected, so be persistent.
Adding Positive Credit Information
Another way you can improve your credit score before applying for a car loan is to add positive credit information that is not currently on your credit report. Write a letter to the credit reporting agency, including your relevant contact information (name, address, social security number, date of birth). Include information about positive credit accounts such as the name of the creditor, credit limit, payment history and proof of payments. Adding this information should increase and improve your credit score.
What Determines Credit Scores?
Borrowers often don't understand what determines their car loan credit score. Knowing what factors both raise and lower your score can help you get into a position to get the very best car loan interest rates and terms. The largest part of your credit score is determined by whether or not you pay bills on time. This accounts for about 35 percent of your credit score. Another thing you can do to help your score is to maintain a high level of available credit, but use the smallest percentage of that credit as possible. Using no more than 50% of your available credit will help your score. This accounts for 30% of your car loan credit score.
Interest Rates in Car Loans
When you call a lender to ask about interest rates, they will give you a simple quote of an interest rate. These quotes are given for comparison purposes only, and are very general.
If you go to the trouble to fill out an application in an effort to be pre-approved for a loan or for loan approval once you have chosen a vehicle, then you'll need additional information about the car you intend to purchase. The year, make and model have an effect on the loan terms.
When dealing with your credit score and car loans, knowledge is power. If you have carefully researched your credit score, you should have a general idea of what to expect in the way of service from a car dealership. Dealers don't actually lend or finance money directly, but they will often provide the service of securing a loan through a partner financing company such as GMAC, Ford Motor Credit or a local bank. You are free to obtain financing on your own if you prefer. Note that dealerships may mark up an interest rate as much as 2% to cover costs that they incur to do business.
Subprime Car Loans
Subprime borrowers can still finance a car purchase. Though, they will generally have to pay higher interest rates and may be required to come up with a substantially higher down payment. In addition, people that have subprime credit may be limited as to what kind of vehicle they are able to purchase. For subprime borrowers, banks or lenders place a particularly high priority on the actual value of the vehicle to be financed.
There is no set credit score that can be considered poor, subprime, good or any other. The score is just a number that generalizes certain aspects of one's credit history. Banks will give much more weight and consideration to a person's actual payment performance and history. In fact, there are some banks that do not use credit scores at all when evaluating loan applications. It's all relative.
How to Get a Car Loan With a Credit Score Around 400
When it comes to taking out a car loan, a credit score of 400 is a poor rating that will undoubtedly hamper your chances of receiving the loan. Your credit score is instrumental in determining your chances of being granted a much needed loan and how easy it will be to apply for said loan. Most banks and credit companies choose not to become involved in transactions with customers with a poor credit score, in order to avoid any unpleasant circumstances that might arise out of the customer's inability to pay back the loan. For those who have a low FICO credit score or a poor credit history, shopping around for a new car loan can prove to be a challenge. A good credit score needed for car loan sanctions can be achieved by rebuilding your reputation, paying back loans quickly and working diligently to repair the situation as soon as possible.
Step 1: Preparation
Before beginning the process of repairing your credit score and finding a loan with a FICO score of around 400 points, it's important to do the following:
- Get all papers and necessary documents in order. These include identification documents, bank receipts, income payment copies, proof of residence and other official papers required for applying for a loan.
- Be prepared with a down payment. Since the objective of this entire exercise is to repair your credit score and find a bank willing to give out a loan, it's important to be ready to pay back at least one installment.
- Have someone ready to be the co-signer when you prepare to apply for the loan. People with a low FICO credit score and bad credit history are usually given loans more easily if they have another individual sharing the responsibility of the loan with them.
- Get A Free Car Loan Quote >>
Step 2: Find a Used Car
With a poor credit score it isn't possible to buy a new car, and sometimes even in the used car category you have to compromise on the kind of car you want. It's better to find a reliable vehicle that is functional and one that is in an affordable range.
Step 3: Find a Specializing Car Dealership
There are certain car dealerships that specialize in dealing with clients who have a low credit score to their name. These dealerships are specially built to cater to the needs of clients who have problems in dealing with their credit scores and who do not have the same financial strengths as the average customers. The advantage of dealing with such firms is that they pay attention to the smallest needs of clients who come in with specific problems, and therefore you have a better chance of getting a loan while also having your individual circumstances taken into account.
Regardless of a good car loan credit score level, one can acquire a loan at any level. Some work and effort may need to be done if the score is lower, but it still achievable.
* Source: MSN Money