Having a strong credit score opens the door to many benefits — including the ability to qualify for a car loan at reasonable interest rates. While you can apply for an auto loan regardless of your score, your approval odds are much more limited when your score isn’t up to par — and you stand to pay much more in interest even if the lender does accept your application. That means you’re facing a much higher monthly payment, and possibly a longer repayment period. Here’s what you need to know as you’re considering your credit auto loan options.
The Credit Score Auto Lenders Use
Your credit score can vary depending on the particular scoring model used by the credit bureau that calculates it. While each of your three scores may vary by several points, the difference is likely not that significant. You may be wondering which score the auto lender will pull when evaluating your loan application. Unfortunately, there is no way to predict this, as it could be any one of the scoring models. Or it could be a model specific to auto lenders. These “auto scores” tend to weigh different factors than a consumer credit score, and they’re mainly used to predict the likelihood of potential auto loan default. Red flags for an auto credit scoring model might include recent bankruptcy, signs of impending bankruptcy, previous late payments on an auto payment, or previous repossessions or collections from an auto loan.
Credit Score Ranges: Why They’re Important to Auto Lenders
The credit bureaus may categorize your credit score as belonging to a certain range. Experian, for example, classifies buyers in certain credit score ranges from the “deep subprime” level of 300–500, all the way up to a super-prime category for 781–850 scores. Most American consumers fall squarely in the 661–780 “prime” bracket. A super-prime consumer would likely have no trouble obtaining an auto loan at the lowest interest rate offered — and spend much less on their auto loan financing than the groups below them. In fact, according to Experian Automotive, in 2017 the average interest rate for the deep subprime buyers was 13.98%, while the top-rung buyers scored an average interest rate of 2.84%.
The Loan Amount and Your Credit Score
When interest is draining so much of your monthly payment, you take much longer to pay off the actual principal (also known as the base amount due on the loan). Because the balance will take much longer to drop, you’ll likely end up owing more on the car than its value, due to the car’s rapid depreciation. On the other hand, having a loan with lower rates will enable you to pay down the principal much faster. You might not be able to keep up with the car’s depreciating value, but you stand a much better chance with a lower interest rate.
The Financing Process
It’s important to shop around for rates from different lenders — and if you can, make it a priority to get pre-approved with a lender before you even fall in love with your dream car. That way, you have a much better idea of the status of your score and the types of rates that are available to you, given your credit score. You may find a much better financing deal with your local bank or credit union than you would through a dealership. For those with higher credit scores, shopping around for rates isn’t as crucial — and the dealership will be able to submit your application to several different lenders to find you the best rate.
You can walk into your local dealership to discuss your credit auto loan options at any time. The marketplace is teeming with lenders that work with applicants with lower credit scores, and it is fairly easy to qualify for an auto loan. But if you have an inkling that your credit score might not be in optimal shape, it’s a great idea to work on boosting your credit score so you can lock in the best possible rates. After all, that’ll ultimately save you the most money over the lifetime of the loan. Plan on taking at least six months to work toward boosting your credit score before you start submitting credit auto loan applications.
Luckily, we can help. When you partner with our credit-savvy pros at Ovation Credit, we’ll repair your credit and give you the boost you need to qualify for that auto loan. Contact us for a free consultation today.