Many prospective car buyers believe it is impossible to buy a car using a loan unless they have a stellar credit score. Nothing could be further from the truth. As a matter of fact, you will be taken aback when you see car dealers fall over themselves to offer you a car on loan terms, even if you have a pretty low credit score.
That said, it is always important to check your credit score before buying a car. You can then proceed to request a car loan aware of how your credit score affects your options and what to do improve your prospects. This guide offers you tips and guidelines on these issues and more.
What is the Lowest Credit Score to Get a Car Loan?
Lenders classify borrowers’ credit scores using a scale that ranges from super-prime to prime, non-prime, sub-prime, and deep sub-prime. If your credit score is between 781 and 850, you will be classified as super-prime while a score of between 300 and 500 is considered deep sub-prime. Having a sub-prime or even deep sub-prime credit rating will not necessarily stop you from accessing credit to buy a car. However, it will affect the options available to you.
How your Credit Score Affects your Quest for a Car Loan
Here is a look at how your credit score affects your options as you shop around for car financing options:
1. If you Have Low Credit Score, Some Lenders May Refuse your Car Loan Reques
If your credit score is rated sub-prime or deep sub-prime, you may find that the pool of creditors willing to approve your loan request is small. How small that pool depends on the type of car and options you need. You may increase the number of willing lenders if you change your consideration from a new to a used car or to one with lower performance or luxury options.
2. Your Car Loan Interest Rate is Influenced by your Credit Score
Lenders consider a borrower with a low credit score a high risk. You are certain to get a high-interest car loan for auto repair without credit check because you do not have an impressive credit rating. The difference between the interest rate offered to a borrower with a high credit score and one with a low one may be only a couple of percentage points. This may not seem significant at first glance, however, as car loans usually amount to thousands of dollars, the final numbers are significantly different.
What to Do if your Credit Score is Low but you Still Need a Car
From what we have discussed above, it may sound as if someone with a low credit score has no choice but to pay through the nose if they want to own a car. It doesn’t have to be so. You can still manage to own a car without having to pay too hefty a penalty for your low credit score. Here are three trustworthy tips to ensure you do so in the most effective way:
1. Wait and Save
Instead of getting your car right away and end up paying exorbitant interest on the loan, you could choose to wait a bit longer. Over the next six months or a year, save the cash you would have been using to pay back the car loan. As such, you will have enough money to make a significant down payment by the time you are ready to get the car. Making a substantial down payment (25% of the offer price is recommended) has a number of obvious advantages to it. For starters, it will reduce the loan amount and, therefore, the total interest charged. Secondly, the car dealer is more likely to offer you a discount if only a fraction of the price is to be financed through a loan.
2. Buy Now, Build Credit, and Refinance the Car Loan
If waiting and saving money in a bid to avoid high-interest rates is doesn’t appeal to you, you still have options to buy a car affordable. You can do it by buying the car right away and then working on improving your credit score. As your credit score is a reflection of how much debt you owe and how promptly you pay your bills, it should be clear what to do. Do not get any more credit cards and avoid buying anything you cannot pay by cash. Just as important, ensure you pay pending bills on or ahead of time and consider paying with greater than the minimum installments agreed with the lender. With these strategies, you will have improved your credit score within six months or so.
With higher credit scores than when you first bought the car, you can refinance your car loan at a much better interest rate. The lender will extend the period over which you were to pay the loan, often by doubling it. This translates to smaller monthly installments and, with an improved credit score, even lower interest. That is welcome news if the monthly repayments were straining your budget. However, there is a catch. Refinancing a loan almost always means you will end up paying more for the car than you would have done under the original terms.
3. Look for a Cosigner
A cosigner is someone, usually a family member or a friend, who agrees to sign your loan with you. Their signature acts as a guarantee that you will pay the amount lent and should you fail, that person, the cosigner, will pay up instead. If your cosigner has a better credit score than you, you will be able to access loans you would otherwise have been locked out of. Even better, the lender will charge you lower interest. If you improve your credit score in the future, you can refinance your loan and remove the cosigner from the loan agreement.
Other Factors that Determine Access to Car Loan Financing
While very important, your credit score is not the only factor creditors consider when deciding whether to offer you a car loan and on what terms. Here is a look at other factors that may improve or lower your chances of getting an auto loan.
1. Nature of your Debts
Many lenders will go beyond a basic credit score and inquire about the nature of your debts before either approving or rejecting your loan request. For instance, if you have a low credit score owing to business debt, but you have consistently paid your car loans, your auto loan request is likely to be approved by most lenders and may attract a favorable credit rating, too.
2. Employment Status and Income
You are more likely to get auto loan financing if you have proof of employment and stable income sources. Therefore, as you shop around for a car loan, remember to bring pay stubs, bank statements, and any other documentary evidence which can prove you are capable of meeting the repayment expectations of the lender.
If you own a home, you may be able to get a car loan on good terms—even if you have a poor credit score. To lend credence to your loan request, provide evidence, such as proof of residence and utility bills.
Have you been agonizing on how your current credit score affects your access to car loans? You can rely on our in-depth guidelines to ensure you get a good car on preferential terms, nonetheless. If you have an eye-opening experience in purchasing a car with a low credit score or any related tips, we would be glad to hear from you, too.