Buying a new or used vehicle is an exciting experience. But before you start thinking about what color, headscarf or model you want to buy, you’ll need to make sure everything is OK: and one of the most important components of this is assessing your credit score.
If you buy a car 100 percent in cash, your credit score will probably never come to the conversation. However, if you are like most Americans, you probably cannot afford to make such a big cash purchase – and there is your credit score.
If you are worried that your credit score is too low to buy a car with financing, I have some good news and some bad news. The good news is that you can breathe a little easier, because rest assured, you will certainly find someone who wants to finance the purchase of your car. The bad news is that if you have a bad score, it will cost you a lot more to fund that purchase than you would have if you had a flawless credit history.
Your credit score is basically a measure for lenders how safe is the risk of lending you money. If you have the perfect credit score, the lender is almost guaranteed that you do not have to be chased and returned by the car for not paying your payments. As such, they are likely to accept low interest rates given the low risk involved. But if your credit score is lower, the likelihood will increase that you will be at risk of flying, and as such, your interest rate will make buying your car much more expensive in the long run.
How bad is bad – and how good is good?
Let’s start with the good. If your credit score is above 700, you will probably expect 5% interest. As your credit score goes down, your rates will go down – and when you hit 500 or below, your interest rate will probably be around 15% or more; yikes!
How can I find my credit score?
Repeat after me: never, never pay to see a credit score! Your credit score, as reported by major credit reporting agencies, is very easy to access: just type “free credit score” into your search engine. Many credit card companies also show their credit score to members as a “perk” of being a card-carrying member.
What should I do if my credit score is low?
It depends on what your options are. If you absolutely must have a new car right now (is that really the case?) Then you will need to focus on a higher interest rate. However, if you have the option, it is a very smart idea to take public transportation, a carpool, a walk, a bike, or even borrow a car from a friend instead of buying a new vehicle with less than stellar credit. Often, free credit reports will show you a list of several reasons why your score is as it is. If your credit score is low because you have a high balance on your credit cards, spend a few months paying off your balance before considering going to a car to pick up a vehicle. If your credit score is low for reasons that are more difficult to resolve in the short term,
If you absolutely must have a car and want to save money, you are probably thinking of buying a used car instead of a new one. Aside from the obvious fact that the sticker price will be lower, if your monthly car payment is lower, this will allow the financial relocation room to focus on determining a bad credit score. But you need to be aware that interest rates are often higher for used cars than they are for new cars. The lower your credit score, the greater the difference between the used rate and the new rate. While it will probably still be a better deal to buy a used car, it is worth worrying about the numbers if you have a very low credit score.
How can you make the process easier – even with a low result
There is a difference between having a lower score because you do not have a lot of credit history and have a low score because you went bankrupt or paid for a credit card.
If you have a score less than 700, your job is to document, document, document. You will especially need to make the case that you are paying on time, and if you successfully do so, you may see rates decrease for those who have the perfect credit score.
Be prepared to back up your claims with proof: Bring credit card statements, receipts of payment, and anything else that shows you to pay on time and in full. If you have a stable job and can lower at least 25% of your car value in retirement, it could also help you secure a lower rate.
If your credit score is less than 500, these techniques probably won’t work so well for you, though that doesn’t mean you shouldn’t try, and you should be prepared for a higher interest rate.
If all else fails, it might be worth asking a relative or very close friend with star credit to sign your loan. If you do this, you may be able to secure a much better interest rate. Just be aware, however, that failure to make a payment will mean that you will be on the financial hook for the full amount of the loan.
What can I do after I have signed my loan and Rate Is Sky High?
The most important thing you can do is to make payments on time in the next 6 to 12 months. You should also focus on repairing your credit score. Do not open new credit cards or apply for other loans: these things will be red flags on your credit report. After the past 6 to 12 months, you should look at options for refinancing your car loan.