Why Do Auto Lenders Check Credit Scores?

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Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - April 13, 2020

Having a bad credit score or lacking a credit history can really hinder your ability to get approved for an auto loan. But why do lenders want to look at your credit score? Here, we explain how your credit score affects your car buying power.

Why Your Credit Score Matters to Lenders

When you apply for an auto loan, your lender will likely review your credit history and use your credit score to determine your eligibility. This is because your credit score is calculated using data that, among other things, measures how you’re currently using credit and how you’ve used credit in the past.

Your credit score is a three-digit number, typically between 300 and 850, that can be viewed as a grade on how well you handle lines of credit. It's calculated from the information listed in your credit reports from credit reporting agencies.

Lenders typically look at more than just your credit score. Some also use your income and residence stability when considering you for approval. However, your credit score is a very large part of your car buying power, because it's made up of a number of factors that have to do with credit usage and repaying loans.

There are a few different credit scoring models used by the major credit bureaus – TransUnion, Experian, and Equifax – but the most common model used by auto lenders is the FICO score. Your FICO credit score is determined by five different factors: payment history, amounts owed, length of credit history, credit mix, and new credit.

With your FICO credit score being calculated using so many factors, it can be a fast and useful tool to lenders when they’re determining whether or not to approve you for a loan.

Your Credit Score and Auto Loans

Since auto loans usually last from four to seven years, and are typically the second-largest loan you ever have (first being a mortgage), lenders pull your credit score to see how well you’re likely to handle a loan that large that’s likely to extend for a long period of time.

Car loans are large purchases and shouldn’t be taken lightly, and auto lenders don’t take them lightly, either. Some lenders may ask about your work history and overall residence stability before you’re considered for a loan – on top of your credit history and score.

Your credit score plays a part in the terms of your car loan. Not only do lenders use it to determine the amount they're willing to finance, but also the interest rate you qualify for.

The interest rate is the cost of borrowing money, charged by the lender. Lenders use your credit score to determine the interest rate you qualify for. The better your score, the lower the interest rate is likely to be. If you have a low score, lenders usually charge you more for loans.

However, if you have bad credit or no credit, you may not get approved for a loan from many traditional lenders.

Building a Credit History

If you have no credit history, also called having a thin file, this means you haven’t borrowed much yet, or at all. But it doesn’t mean your credit score is zero. With little or no credit history, you’re likely in the lower middle, or subprime, range.

Having no credit isn’t necessarily a bad thing or a good thing, but lenders may view you as a higher risk. Without a history of how you’ve handled repaying loans, auto lenders can be hesitant to approve someone who hasn’t proven their ability to repay loans responsibly yet. With a thin file, you also likely don’t have a long history of consistent on-time payments.

That being said, the biggest factor in your FICO credit score is payment history, making up a whopping 35% of it. Once you borrow money and establish a good payment history, it can really help build your score.

An installment loan is a loan that’s repaid over a fixed period of time, with fixed payments. Car loans are installment loans, and they typically last for a number of years. Once an installment loan is completed, and you’ve kept up on the payments, your credit history reflects that activity, and your credit score should improve.

With new and bad credit borrowers, it can be hard to get approved for any type of installment loan. But there are auto loan options for these credit-challenged borrowers that can start a credit history off on the right foot.

Car Loans for Credit-Challenged Borrowers

Traditional lenders may not approve a borrower with a shaky credit history or a one with no credit. But there are a few routes you could take to get approved for a car loan.

There are dealers that typically don’t use your credit score when determining if you qualify for an auto loan. These are called buy here pay here (BHPH) dealerships, where the dealer is also the lender. However, while they don’t usually check credit scores, they also may not report your loan or timely payments to the credit reporting bureaus, meaning your score won’t increase. But if you needed a vehicle yesterday, these dealerships may be worth exploring. Be prepared to bring a hefty down payment, though.

Another option is working with a subprime lender. Subprime lenders work through dealers with special finance departments. They use your credit score, income, work and residence stability, a down payment, and more to gauge your ability to successfully complete an auto loan. Not all dealerships have special finance departments, and tracking one down in your area could mean making lots of calls or fruitless drives to random dealers. But we can help with that.

At CarsDirect, we’re connected with dealerships all over the country that have special finance departments. We match borrowers with all types of credit situations to dealers that work with subprime lenders. To find a dealership in your area, just complete our free car loan request form, and we’ll get started.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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