If you’re in the market to buy a vehicle, a car loan is one option for financing your purchase. Here, we’ll cover the steps you need to take for a successful application and what you need to know about your credit score when applying for this loan type.
A car loan is secured against the vehicle you’re hoping to buy. If you don’t make timely and complete repayments, the lender can take back the vehicle. In short, you don’t own the car until the loan term ends and all the payments are made.
Preparing to Apply for a Car Loan: Check Your Credit Score
First, you need to factor in your current credit score and credit history. Regardless of where you apply, lenders will check your credit report and score to get a better idea of your ability to make repayments.
The two major commercial scoring systems are FICO and VantageScore. Both models give you a rating somewhere between 300 and 850 points, based on the data on your credit report. They get this data from credit bureaus or agencies, such as Experian, TransUnion, and Equifax. The higher your credit score, the more likely lenders are to approve your car loan, and on better terms, too (such as lower interest rates).
How to Monitor Your Credit Score
LendingTree allows you to check your credit score on its website at no cost. Armed with that information, you can look for a vehicle knowing whether you’re likely to be approved for a loan or not. This gives you a more realistic idea of your budget.
It’s also a good idea to check for any issues on your credit report that could adversely affect a car loan application. Annual Credit Report.com lets you pull free reports from the three major credit bureaus. Companies such as Credit Saint and Lexington Law offer services that help with fixing errors on your credit report.
Now, let’s talk about what credit score is needed to buy a car and what you can do to improve your credit before applying for a loan.
The Minimum Credit Score for Buying A Car
According to Experian’s report, State of the Automotive Finance Market, Q2 2020, all potential borrowers belong to one of the categories below.
|Category||Credit Score Range|
Lenders generally offer car loans to borrowers in the prime range or higher. This means you’ll need to have a credit score of 661 or more to qualify for a car loan.
Improving Your Credit Score
If your score is not quite there yet, you can take some steps to increase it:
- Pay any overdue bills
- Pay any subsequent bills on time and in full
- Try to lower outstanding balances on your credit cards
- Regularly check your credit reports to see if the information there is correct, and find out if there are any less obvious reasons for your low score.
How To Get Preapproved for A Car Loan
Preapproval is when a lender carries out an initial assessment of your financial status to decide if they should offer you a loan. It can be a time-saver – it lets you know if your full application is likely to be approved (although there’s no guarantee), as well as the amount the lender would offer you, the proposed interest rate, and how long you’ll be paying it back.
It’s always a good idea to research a few lenders to find out who will offer you the best conditions. Lenders can include car dealerships, banks, and credit unions. AutoPay can help you find great loan terms. Once you’ve found a suitable lender, it’s time to start filling out preapproval applications. You’ll probably need to submit your payslips, tax returns, and bank statements as supporting documents.
Car Loan Preapprovals Don’t Hurt Your Credit Score
According to Money, “you can seek pre-approvals from several lenders — to compare their offers precisely — with little or no risk of accumulating damage to your credit score … multiple inquiries within a given period of time (typically 14 to 45 days) are generally counted as one inquiry, according to credit bureau Equifax.”
The Effects of Your Credit Score on Car Insurance
Whether you’re buying a new or used car, you’ll be thinking about car insurance –
the cost, how insurers calculate their premiums, and, possibly, does credit score affect car insurance?
Car Insurance Costs
Insurance companies will differ in the premiums they offer. But all insurers calculate the cost of car insurance based on three factors—your profile, the car you want to insure, and the type of insurance you choose.
Factors that Impact Car Insurance Premiums
Insurance companies review the following when calculating your premiums:
- Your age
- Your gender
- The area you live in
- The type of car (certain cars are more high risk)
- Where you keep or park the car
- Your driving records
- Your insurance scores
How Your Credit Affects Your Car Insurance
Although insurance scores and credit scores are different, they are both calculated using your credit report and credit history.
Therefore, things like these all impact insurance premiums.:
- How and when you pay your bills
- New credit applications you’ve made
- How much of your available credit you use
- And the number of credit accounts you have
Your credit score reflects how responsible you are.
Insurers believe that this gives them an idea of how you’ll handle your car, as well as how likely it is that you’ll claim from them.
A low credit score gives insurers the impression that you’re more likely to make a claim. They factor this in by increasing your premiums. Higher credit scores usually give them more confidence, resulting in lower premiums.
Check your credit health before applying for car loan preapprovals or approvals
If you need to bring your credit score up, our handy guide to credit repair can help
Shop around for the best car loan terms