For a wide variety of reasons, your credit score might not be where you want it. However, it is possible to buy a car with less than desirable credit. There are also things you can do to reduce your overall monthly payment if you have credit issues, such as making a larger down payment. Your credit score has a direct impact on your interest rate when your financing package is put together. Let's take a look at how you can purchase a car if you have a lower credit score than average.
Before you are approved for a loan, the lender pulls your credit report. Your credit report and score determine whether you are approved for a loan and what interest rate you get. The lender will pull your credit report from either Equifax, Experian, or TransUnion. Lenders will use either of these credit agencies to determine your credit score. If you are purchasing a new car, the interest rate at your credit tier will likely be lower than if you had secured a loan for a used car. According to Experian, these were the average interest rates at each tier of credit score:
While there isn't a set formula for loan approval, there are some factors that may result in a denial. These include:
A loan denial from a particular lender doesn't necessarily mean you won't be able to buy a new car. Dealerships usually have a portfolio of lenders that they work with who lend to people with all types of credit backgrounds.
You can start getting ready for the loan application process by getting control of your finances. Here are some general tips for working on your credit:
When you are shopping for a car loan, you probably have two concerns. The first is whether a hard credit pull will impact your score. The second concern you might have is how taking on additional debt hurts your credit. When you apply for an auto loan, there may be multiple inquiries into your credit from different lenders. If your credit score is borderline, you shouldn't worry about the multiple hard pulls, as they get rolled into one inquiry. A hard pull usually only drops your credit score by a few points.
When you are approved for an auto loan, your credit score will also drop by a few points. Your credit score will improve over time as you make payments. Additionally, your credit score will also improve, as in most cases, an auto loan improves your overall credit mix.
Your credit score can be improved in as little as thirty days, depending on your financial situation. A missed payment on a credit card won't be reported if you act within thirty days of the deadline. Here is a breakdown of how long various types of credit issues stay on your report:
Let's say that you are looking at a Honda Civic with an MSRP of $27,029, a down payment of $5,000, and an interest rate of 3.5%. You will pay just over $2,000 in interest over the life of that loan, assuming a loan term of sixteen months because your credit score is in the prime category. Let's say that you have a credit score of 655, which is just five points shy of the prime category. The same Honda Civic with a credit score of 655 will fall into the subprime category, which has an average 6.07% interest rate. You will pay $3,566.98 in interest over the life of the loan. By improving your credit score, you will have saved $1,500.