Your credit score is one of the first things lenders look at when you take out a car loan. Your credit rating is a reflection of your credit history and spending habits through the years. This simple number could make or break your credit application.
The reason credit ratings are so important is because lenders use it to gauge your ability to repay the car loan. Usually, the higher your credit score is, the better your chances of getting a good car loan. But there’s more to it than just numbers. Read on to learn about how your credit score affects your ability to get a car loan and what happens if you have bad credit.
Credit scores impact car loan approval
Lenders use your credit score as a basis when analysing your creditworthiness. From there, lenders determine your ‘risk’ as a borrower or the possibility that you would default on your car loan.
They also use your credit report to see if you’re fit for a certain type of car loan. For instance, your credit score may be good enough to get a secured loan in a certain price range but not suitable for an unsecured loan with a higher principal amount.
Generally, if you’re seen as a high-risk borrower, your car loan application is likely to get rejected. Even though your credit score plays an important part in the evaluation process, lenders determine your risk as a borrower by looking at your savings, debt-to-income ratio, and other financial factors, as well.
Credit scores affect your car loan rates and terms
Aside from general car loan approval, your credit score can also affect the type of loan you might get. Usually, the higher your credit score is, the better rates and more flexible terms.
If you have a fairly high credit rating, lenders may see it as proof that you’re a low risk and unlikely to miss repayments. This means you have a better chance of getting low interest rates and more favourable loan features. You could also be allowed to borrow more if you have an above average credit score.
Of course, the opposite is true when you have a low credit score. For those with poor credit ratings, you may get higher interest rates. Lenders do this to compensate for your perceived risk of defaulting on the loan. The amount you’ll be able to borrow may also be limited.
Bad credit car loans for borrowers with low credit scores
Getting a car loan with a poor credit rating is more than possible. In fact, there are car loans out there specifically designed for those who don’t have the best credit rating, these are called ‘bad credit car loans’. As the name implies, it’s a type of car loan for those who don’t meet the standard car loan criteria. People who may find bad credit car loans beneficial would be those with a history of defaults, bankruptcy, limited credit history, or self-employed individuals.
With a bad credit car loan, you don’t have to spend months or years building your credit for car finance. Get in touch with CarLoans.com.au to learn more about your bad credit car loan options. Call 1300 889 669 or request a quote today and our expert brokers will get in touch as soon as possible.
Submitting loan applications decreases your credit score
Applying for loans can negatively impact your credit score, as well. Every time you submit a loan application, whether it be for a car loan, home loan, or personal loan, the lender will do a credit check on you which results in a hard inquiry on your report. A hard inquiry decreases your credit score by a few points.
When you apply to multiple loans in quick succession, your credit score will decline. Lenders also see this as a red flag because they assume you’re in financial distress to be applying for so many loans. If you want to get the best rate on your car loan, you don’t need to apply for multiple car loans. All you need to do is compare different car loans available or get help from a brokerage service like CarLoans.com.au. Working with a broker can make the whole car loan search easier and stress-free.