Unless you’re in a position to pay cash for that new car you’re eyeing, your credit score is going to be a significant determining factor in your ability to acquire it. So, let’s take a quick look at how credit affects car loans.
Your Credit Score Is the Determining Factor
When you ask someone to loan you money—regardless of the amount, or who they are—their first consideration is going to be how likely you are to repay them. Family and friends will mentally review your personal history to come to a decision. They’ll probably agree to front you some cash, if you’ve always demonstrated a propensity for handling responsibility properly.
If you haven’t—well—things might go a bit differently.
Financial institutions do the same thing. They review your past financial transactions to predict how you’ll behave in the future. An organization known as Fair Isaac & Company (FICO) came up with the algorithm lenders use to rank the likelihood of you repaying a loan. Based upon how you’ve handled your credit accounts in the past, this ranking is known as your FICO score.
The three major credit-reporting agencies (Equifax, Experian, and TransUnion) use FICO scores to advise lenders of the degree of risk loaning you money entails.
How Credit Scores Work
FICO scores typically range from 300 to 850, with anything below 580 considered poor credit. Fair credit ranges between 580 and 669. A good score falls between 670 and 739. Anything between 740 and 799 is looked upon as very good, while a score above 800 is considered exceptional.
These numbers are calculated based upon five factors, which are weighted as follows: Payment History (35 percent), Debt Burden (30 percent), Length of History (15 percent), Types of Credit (10 percent) and Recent Credit Searches (10 percent).
As you might expect, the most important factor is repaying your debts on time. The amount of outstanding obligations you have is the second consideration, while the length of your credit history, the types of accounts you’ve had and the number of recent inquiries into your activities round out the parameters.
By the way, you’re entitled by law to a free copy of your credit report each year. The best place to get it is at AnnualCreditReport.com and self-inquiries do not have a negative impact on your score.
What Does This Mean for Car Loans?
We’ve all seen ads touting zero-percent financing deals, special low interest loans with deferred payments and lease deals with no cash out of pocket terms. If you look closely though, the fine print in those ads always say those arrangements are for people with good credit scores or better. In fact, it’s very difficult to lease a car at all with poor credit—if not impossible.
Don’t worry though; you’ll still be able to get a loan in most cases, even if your credit score is on the lower side. But you’ll pay more for it. The amount of interest you’ll be charged for a car loan has a direct correlation to the nature of your credit history. If your score indicates you represent limited risk, you’ll be charged a lower interest rate. If you look to be a something of a gamble, your interest rate will be higher.
Additionally, the lower your credit score, the more significant the down payment you provide will need to be to reduce the risk to the lender. Meanwhile, people with great credit can sometimes get cars with no down payment at all.
Now, with all of that said, a lot of people who have troubled credit histories need a car to get back and forth to work so they can turn things around. If you fall into this category, you’ll find RoadLoans no credit check car loans might be the solution you need.
What About Cash?
As mentioned in the introduction, you can bypass all of this process including credit checks if you simply pay cash in total for the vehicle. Admittedly, this can be tough for some folks as automobiles cost in the thousands or tens of thousands.
Still, if you scrimp and save you can walk into a dealership with cash in hand. This might even afford you a better position during negotiations. Plus, you won’t have to worry about credit checks, interest rates, the duration of your loan or anything else. Just something to keep in mind.
