A vehicle often plays a key role in the success of a company and its founder; some entrepreneurs spend a lot of time on the road and need a car that serve well as mobile office, while some may need a car to commute to and from the office.
When it comes to get a new car for business use or for personal use even, most startup entrepreneurs would need car financing. And having the car of your dreams can be pretty exciting until you have to decide and deal with the financing. There are several types of car finance you can scout. But it can be unnerving to find out later that you only have few options because of some credit problems.
It’s typical for many buyers to get overwhelmed with the idea of buying a car that they tend to focus more on the less important factors such as color, brand, and special features. They often overlook the financial responsibility that comes along with an auto purchase. Whether you like it or not, car financing can be frustrating unless you’re financially prepared.
Thus, if you don’t want to experience the same kind of frustration, one way to go about it is to take your credit seriously. Read on to discover how your credit score can significantly affect your options in financing your dream car.
Understanding Credit Score
Your credit score can range between 300-850. It can show your creditworthiness, which means the probability that you’ll repay or default on your credit obligations. Lenders or creditors use these numbers to determine whether you’re worthy of getting approved on loan or receive new credit.
Based on the information reported by your past creditors or lenders, these credit scores are provided by Equifax, Experian, and TransUnion, the three major credit bureaus. It’s essential to note, though, that your credit score is generated from the evaluation of several factors, such as your payment history and type of credit accounts.
All the information relevant to your credit is collected by the credit bureaus and placed in your credit report. When you’re applying for any financing, your potential creditor or lender is more likely to have access to that report to check your creditworthiness.
But lenders don’t need to spend so much time probing through each credit report of thousands of loan applicants. By just looking at your score, they already have a quick and general idea of your creditworthiness.
Why Does Credit Score Matter To Car Financing?
If a lender approved you for credit or a loan, they would want to make sure that you’re going to repay them. Since they utilize credit scores to evaluate you, lenders would be more confident of extending you the funds that you need if your score is excellent.
Specifically, a credit score of 750 or higher is considered excellent credit. Borrowers that belong to this category may be entitled to special financing incentives offered by automakers. On the other hand, you can still expect low-interest rates if your score is between 700-749, but it can be harder to qualify for special financing deals.
Moreover, if your credit is between 600-699, your interest rates can be significantly more expensive than those with better credit scores. But if your score is below 600, some lenders may not extend you credit any more. If ever they will, you can expect to pay considerably higher interest rates.
Thus, your credit score matters as it will be the determining factor for what type of auto financing you’ll qualify for and what interest rate you’ll have to pay on loan. These are essential if you want to increase your chance of getting approved for a loan with better terms and saving a lot of money in the long run.
Possible Effects of Poor Credit Score
Having a low credit score doesn’t automatically mean you won’t get access to car financing. But as you might have already figured out, you’ll have to pay more since lenders are taking a risk by approving you with the loan.
Besides being charged with higher interest rates, your financial health would most likely be affected. Note that your ability to repay the loan is crucial. Thus, if you pay such a premium rate, you would need to adjust your budget for the monthly payment. If it’s too much to cover with your means, it’s another problem you’ll have to deal with.
Being rejected for a car loan isn’t the only worst thing that can happen. Because if one lender refused to extend you a credit, others might still give you a chance. However, multiple credit applications within a short period can be alarming to lenders. It might be considered simply inquiries, but other lenders may view it as a sign of risk for other types of credit.
Credit scores may affect not only present financial endeavors but even the future ones. Unfortunately, the effects are not exclusive to car financing but other types of financing as well. The good thing is you can do something about your credit before it can take a toll on your financial endeavor.
If you discover you have a low credit rating, you can work on it by paying your current bills on time and settling your old debt. These two factors could be a great help in improving your credit. You can also consider saving a lot for a downpayment since paying more in advance will reduce the amount you need to borrow, which means less interest in the overall loan cost.
Getting financing for your car is only the start. Though it’s vital to check your credit score to get approved for a car loan, taking a look at your financial health is more significant. Keep in mind that you would still be paying the loan. Thus, it’s crucial to consider how much you can exactly afford. Else, you might find your future self struggling over such a financial burden.