Your credit score is an important factor that lenders look at when evaluating your car loan application.
Banks use this number to assess your creditworthiness, and it can significantly impact your ability to secure good financing terms. In certain situations, it could even mean your application gets turned down.
Here's five ways your credit score influences a car loan:
Loan approval chances
Your credit score serves as the number one indicator of your creditworthiness. Lenders use this score to assess your risk level as a borrower and determine the likelihood that you’ll default. A higher credit score typically increases your chances of loan approval, while a lower score might result in rejection. However, lenders also consider other factors like savings and debt-to-income ratio when making their decision.
Interest rates
Credit scores directly impact the interest rates you'll be offered. Borrowers with high credit scores often qualify for lower interest rates, as they're considered low-risk. On the flip side, those with poor credit scores may face higher interest rates to compensate for the increased lending risk. This difference in rates can affect your monthly payments and total loan cost.
Loan terms and features
Your credit score influences the flexibility of loan terms available to you. High credit scores often give a borrower access to better loan features, longer repayment periods and larger loan amounts. Lower scores might restrict you to shorter terms and limited features.
Bad credit options
Specialised car loans are available for those with poor credit scores. These loans are designed for borrowers with defaults, bankruptcy history or limited credit history. While these loans typically come with higher interest rates, they provide an opportunity to finance a vehicle without waiting to improve your credit score.
Impact of multiple applications
Each car loan application triggers a hard inquiry on your credit report, temporarily lowering your score. Multiple applications in a short period can significantly decrease your score and may be viewed negatively by lenders. Instead of submitting multiple applications, consider working with a broker who can help you compare loans without affecting your credit score.