Build Your Credit Before Car Shopping
If you still arent getting car loan rates that work for you, it might be time to delay your car purchase and work on building your credit. That means:
Paying bills on time. A payment that goes 30 days past due can devastate your score, so pay at least the minimum on time.
Keeping credit card balances low compared to your credit limits. How much of your limits you’re using is called your credit utilization, and it has a big effect on your score. You can try a number of tactics to lower your credit utilization in order to bump up your score.
Avoiding applications for other credit within six months of applying for a car loan.
Keeping credit card accounts open unless there’s a compelling reason to close them. Closing cards reduces your overall credit limit, which can hurt your credit utilization.
Whats The Ideal Credit Score For A Car Loan
Auto-loan lenders look for a borrower with a credit score in the mid-600s in Canada. A credit score between 630 and 650 is generally what lenders want to see.With this, there is some leeway around your credit score requirements when looking to obtain a car loan. Dependent on your lender or bank, sometimes they will be stricter and look for higher credit scores. At the same time, alternative lenders are often willing to accept lower credit scores. Some dealerships can also help borrowers find financing to meet their specific credit needs.
If your credit score is below 630, dont stress! You can still obtain a car loan. When youre shopping around, its important to keep your mind open to the idea your loan may cost a little more. It can take some time to find a lender that will work your low score. Find out more on obtaining a loan with bad credit here.
How Can You Improve Your Credit Scores
- Correct credit report errors. Take a look at your credit report from each of the reporting bureaus. Make sure the information is right, and contact the bureaus if anything needs to be corrected.
- Make payments on time. Consider automating your payments to ensure you never miss one.
- Pay off debts. You may want to target high interest credit card debt first. As you pay off high interest debts, youll have more money to direct toward becoming debt free.
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Why The Car Dealer’s Score Will Never Match Your Score
People having been falling for the marketing from the credit bureaus for many years, thinking there is only one credit score available the one they are about to sell to you.
There are actually thousands of possible credit scores, depending on the direction of the prevailing winds. You know the saying ask 100 people you’ll get 100 different answers. Go to 100 dealers and lenders and you will get 100 different scores. There are a zillion ways you can slice and dice the data from your credit report to generate a score and everyone’s formula is different. The dealers use a different software tool to generate your score than you do, so they will never match up.
The credit bureaus will tell you that the 3-Bureau scores are calculated by their own proprietary models, so if you order the 3-score from Experian, Equifax or TransUnion, each will give you a different number.
Minimum Credit Score Needed For A Car Loan In Canada
Generally speaking, lenders prefer when applicants have a credit score in the mid-600s for car loans in Canada. Lenders are especially happy when an applicantâs credit score is somewhere between 630 and 650. The more confident the lender is in lending money, the lower the interest rate that person will have to pay on the car loan.
That being said, there is some flexibility around this credit score requirement depending on the lender and borrower. Some lenders, including most banks, will be more stringent and look for higher credit scores. Whereas alternative lenders are often willing to accept lower credit scores. Some dealerships can also help borrowers find financing to meet their specific credit needs.
If your credit score is below 630, don’t panic! You still have a great chance of getting approved for a car loan. Check out this article for more information about getting approved for a bad credit car loan. When shopping around, you will need to keep an open mind and stay realistic. It can take some time to find a lender that will work with you if you have bad credit so patience is essential.
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The Process Doesnt Have To Be Difficult
No one likes the process of buying a car and guess what? Dealers dont want it to be that difficult either. To make it as painless as possible do your research beforehand and know what other dealerships are charging for the car you want to buy. If you want to know what a great price is, youll have to know what a bad price is. Knowing that there might be some competition for your business could possibly make your dealer offer a more competitive price.
Check out how dealerships are screwing Canadians overs.
If youre really arent into haggling then you can always look for a dealership that works to be transparent with its customers. Some dealerships find that if they are up front and honest with potential buyers then they are more likely to make a sale. Not all dealerships work this way so its up to you to find a dealership that best suits your situation.
Watch out for these dealership hidden fees.
How To Access Your Fico Auto Scores
While some credit scores can be monitored for free, you may have to hand over some cash if you want access to your FICO® Auto Scores. When you pay $39.95 a month through FICO, you can monitor a handful of your credit reports and scores, including your FICO® Auto Scores.
Before you pay for credit monitoring though, note that there are several versions of the FICO® Auto Score model. Monitoring just one doesnt guarantee youll see the same version your lender pulls. Consider calling your prospective lenders financing department to see which version they use, and check to see which scores youll get through the monitoring service, before paying for your scores.
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Purchase A Used Car From Car
When you purchase from Car-N-Credit, we dont rely on your credit score like other dealerships. We look at the bigger picture. Our financial team can help you get into a used car that fits your budget and needs. Contact our friendly staff to see how we can help you get into a used car. We offer a variety of loan options to customers located within 60 miles of our dealership. Our wide selection of vehicles makes it possible for you to find a car that works for you. So, come on down to our dealership in Piqua, Ohio and browse our inventory, or call us today at 773-0895 for a bad credit car loan!
Better Credit Means Lower Costs
Interest rates differ based on your credit score, so knowing what to expect on average can help you budget for your car. A target credit score of 661 or above should get you a new-car loan with an annual percentage rate of around 3.64% or better, or a used-car loan around 5.35%.
Someone with a score in the low 700s might see rates on used cars of about 5.35%, compared with 17.11% or more for a buyer scoring in the mid-500s, according to the data from Experian. Using a car loan calculator illustrates the difference that can make.
For example, on a $20,000, five-year used-car loan with no down payment, thats a monthly payment of about $382 for the buyer with a higher credit score versus $498 for the buyer with a lower credit score. The buyer with better credit would pay about $2,915 in interest over the life of the loan, while the buyer with lesser credit would pay around $9,894. Plus, in most states, bad credit can mean higher car insurance rates, too.
The differences arent quite as steep for new-car loans: Borrowers with scores in the low 700s can expect an average rate of 3.64% compared to 11.03% for borrowers with credit in the mid-500s.
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Financing Through A Bank
Bank financing involves going directly to a bank or credit union to get a car loan. In general, you’ll get preapproved for a loan before you ever set foot in the dealership. The lender will give you a quote and a letter of commitment that you can take to the dealer, saving yourself some time when finalizing the contract. Having a specific approved loan amount on paper could also keep the car salesperson from trying to persuade you to include add-ons that you don’t need.
Depending on the bank or credit union, you can apply for preapproval online or at a local branch. You may need to provide information about the vehicle, which could cause some delays if you’re not yet sure what you want.
The rate offer from a bank or credit union will be the true interest rate and doesn’t include any markup, which can happen when you work with a dealer. In general, though, the rate quote you get isn’t a final offer. When you head to the dealership to purchase the car, the lender will run a hard credit check and review your full credit report before approving your application and determining your loan rates.
One thing to keep in mind is that your options may vary depending on whether you’re buying a new or used car. Some banks and credit unions have limits on the vehicle’s age and mileage, and new vehicles may qualify for lower interest rates in general.
What Credit Score Is Used When Buying A Car
Different car lenders check different credit scores, so you won’t know for sure which one they will look at when determining your auto loan application. Your best bet, however, would be to check something called an industry-specific score.
FICO provides industry-specific scores that consumers can refer to when making certain purchases like a car or home. Just like a standard credit score, your industry-specific score helps determine future loan terms and interest rates.
The FICO Auto Score considers your usual credit behaviors but puts more emphasis on how you’ve managed auto loan payments in the past. It considers things like: have you consistently made your loan payments, and on time? FICO Auto Scores range from 250 to 900 and have several versions, including FICO Auto Scores 2, 4, 5 and 8. The easiest way to check all four FICO Auto Scores at the same time is through FICO’s credit monitoring service.
Knowing your auto-related credit score can be useful when financing a car, since it can affect your loan terms and rates. Any increase in your interest rate can lead to a higher monthly payment and paying thousands of dollars more over the course of a loan.
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So What Credit Score Do You Need To Buy A Car
There’s no official industry standard minimum credit score that you need to secure a car loan. Like other loans though, the higher your score the better your terms will be, and moving into a better “tier” of credit score could lead to substantial savings.
To understand how auto lenders may tier their loan interest rates based on FICO® Scores, review this example: Assume you want to secure a $22,000 car loan with a 4-year term, and your current FICO Auto Score is 652.
Source: Loans Saving Calculator based on rates from June 2020
Based on the interest rate table above, your monthly payment would be $566, and you would pay a total of $5,147 in interest over the life of the loan. If you increase your score to 720+, your monthly payment would be $67 lower, and you could save an extra $3,218 in interest fees over the 4-year term.
Knowing your FICO® Auto Scores can help you understand what kinds of terms you may expect for an auto loan, and armed with this information, you can approach the financing interactions with more insights and confidence.
Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.
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How Does Your Credit Score Affect Your Car Insurance Premiums
Car insurance companies use an Auto Insurance Score to determine your insurance premiums and rates. Your AIS is meant to indicate the likelihood of you getting into a car accident and filing a claim. The higher the risk, the higher your insurance rate and premium.
Your AIS is made up of three factors: your driving record, your auto claims history and your credit score. It surprises most people to know that the credit score is given the highest priority in the calculation. However, multiple studies have found that theres a correlation between driving risk and credit history. In particular, insurers are looking to see how much financial liability the consumer has taken on in the past and how theyve managed it.
So, a low credit score can cost you more in buying a car, and it can drive your insurance premium up as well. In fact, some car insurance companies may deny you coverage if your credit score is too low. Note that not all car insurers use AIS, but the majority do.
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How To Improve Your Credit Score And Increase Your Chances For Approval
Before applying for a car loan, you need to know your credit score and do whatever you can to boost it if itâs low. You can further increase your chances of approval by researching the car loan market and lenders you’re interested in working with. More often than not, choosing the right lender is the first step in getting approved for the car loan you need.
If you’re interested in improving your credit score before applying for car financing, make sure that you:
- Check your credit score to see where you stand
- Contact a credit bureau to fix any mistakes you find in your credit report
- Pay off as much outstanding debt as you can afford
- Start making on-time, full and consistent payments towards other debt
- Gather multiple car loan offers, compare, and negotiate with lenders
- Consider saving up a down payment of 20-percent
- Consider your budget, specifically how much you can afford to pay in car loan payments and car insurance
Depending on the state of your credit, trying out even a few of these can help give your credit score the boost you want.
Finding The Right Car Loan Lender
Because car loan lenders vary in their credit score requirements, your job is to find a lender that will work with your credit to extend financing for a car. What many borrowers forget is that lending is a two-way street. Borrowers have just as much of a right as lenders to get a deal they want and that works for their financial situation.
To get the best deal possible, ask yourself the following questions when evaluating your lender:
- Are you pressed for time to get approved for financing?
- Do you have bad credit?
- Is convenience important to you?
- Are you willing to shop around to find the best deal possible?
- Is this your first car loan and you don’t know where to start?
- What are your current and long-term financial goals?
- Do the car loans offered align with your financial goals?
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Consider Bringing Your Own Financing
While dealerships do provide financing, checking with your local bank or credit union is a good idea, too. You can even compare car loan rates online. Compare quotes from the top potential lenders and, once youve settled on your top choice, you can get preapproved to make the process run smoothly,
Keep in mind that getting financing results in a hard pull on your credit. It helps to cluster applications closely together when rate-shopping for a loan.
If you end up with a loan with a higher rate than you wanted, keep an eye on your scores. You may be able to refinance your auto loan at a lower rate after youve made on-time payments for six to 12 months.
Consider Getting A Cosigner
Depending on your situation, getting a cosigner might be your best option to get a loan at a reasonable interest rate. Consider looking for a cosigner if:
- Your income is lower than the minimum requirement for a car loan
- You have bad credit
- Your debt-to-income ratio is too high to qualify for a loan
- You have a variable income
Your cosigner is responsible for making your monthly payment if you cant fulfill your loan obligations, so only take this approach if you are confident you can make your payments in full and on time. Using a cosigner lets you leverage that persons credit score to get a better interest rate or loan terms.
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Whats A Good Credit Score In Canada
If youre trying to figure out whats a good credit score in Canada, its important to remember that a good score is one that gets you the most competitive interest rates. It also gives you more legroom to shop around if you wish. You can still get a car loan with a bad credit score, but it will end up being a lot more expensive.
Your credit score allows lenders to decide your creditworthiness, and if youre a risk theyre willing to take on. If you have a bad credit score, you generally present a higher risk, hence why your interest may be a lot higher. When checking your credit score, most lenders and institutions will use the following guidelines:
- Poor 300 560
- Excellent 760 900