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The first factor to consider when requesting car financing is your credit score. It will show lenders how trustworthy you are from a financial point of view. Your credit rating is the figure that also may suggest the amount of interest you’ll pay on loan products.
This article will cover the credit score’s definition, its impact on getting car financing, and how to improve your credit score to get the most suitable interest rate on your loan offer.
Understanding Credit Scores
Your credit score is a numerical representation of credit files. We are talking about your credit report issued by three major credit reporting bureaus: TransUnion, Equifax, and Experian. This three-digit number ranges from 300 to 850 and is calculated based on your credit history, debt, and bill payments.
You don’t have one credit score; instead, you have several credit scores calculated slightly differently by mentioned credit companies. It happens because their scoring formula is different. For example, the FICO score could be 8, but the VantageScore – be just three. Not all services report your credit situation to the credit bureaus; instead, they may use alternative credit companies. That’s why its assessment differs from one another.
Factors that affect both credit score models are the following:
- Paying bills on time;
- The total amount of debt you owe;
- Credit history age;
- Your credit mix (for example, credit card plus a traditional loan);
- The frequency of applying for a loan.
However, you should know the importance of a good credit score (from 690 and higher) for car financing. It will allow you to get cheaper loan offers and more flexible repayment terms.
How Do Credit Scores Affect Car Financing?
Lenders use credit scores to determine interest rates on your car financing by considering your payments’ history, income, debt-to-income ratio, and current economic situation.
A lower credit score can result in higher interest rates and larger down payments for car loans. So if you want to qualify better for car financing, consider increasing your credit score.
Improving Your Credit Score
Here are several tips on improving your credit score in the long term and enjoying the best rates on the market:
- Cover all your bills on time (be it utilities, medical bills, or other living expenses that require monthly payments);
- Don’t exceed the credit card limits above 30% (try to keep them even lower);
- Don’t open new credit accounts too often (just keep open the old one and protect the average age of your accounts);
- Consider having a mix of credit cards and traditional loans;
- Try to have significant space between loan applications. Requiring loans too often may damage your credit score because most lenders will perform hard credit checks via major credit companies.
Other Factors Affecting Car Financing
Besides your credit score and payment history, two other factors could affect your car financing: your job and income. Don’t underestimate their importance when applying for car financing. Lenders might require the contact details of your superiors and ask them about your annual income and promotion possibilities. They do it to assess your ability to repay the long-term loan.
You must have a stable workplace and monthly income (at least $1,200 per month) to make the loan payments on time. If your paycheck doesn’t allow you to make fixed monthly installments, consider requesting a raise the following month.
Purchasing a car isn’t a whim; it’s a daily need that will make your life easier. However, you should do wide research before applying for car financing. We are sure you remembered the main points covered in the article and are ready to explore your opportunities.