Should you decide to make a large purchase, a bad credit score could become a massive obstacle and often a deal-breaker. With the current market, it would be very challenging to get a mortgage loan with credit scores under 600 (the range being 300-850). However, things are a little different for auto loans.
The current situation
Rich Hyde, the COO of Prestige Financial Services, stated: “There is no minimum credit score to get a loan. Various lenders offer different chances and use various factors for evaluation.”
These factors include things such as your debt-to-payment and debt-to-income ratios, prior payment experiences, and employment history. The type of car you want to finance and down payment size are also considered. The overall loan cost will depend on the loan term and monthly car payment amounts. With smart calculations, even bad credit score could get approved.
Over the recent years, there has been an increase in low credit scores being approved for auto financing. According to Experian, the average credit score for new vehicle loans was 711 in the 4th quarter of 2015 and 712 a year prior. The average has been steadily decreasing for the past 6 years. Another fact is that people who are purchasing used vehicles often go with a lower credit score, compared to those who are buying new models. The exact number has decreased from 659 to 649 over the past few years.
Melinda Zabritski, Experian Automotive’s senior director of automotive financing stated that “more and more consumers with low scores are able to get approved for auto loans. The market has practically converted back to the pre-recession status.”
Applying for a loan
There are various types of auto lenders on the market, and each one targets a different credit tier. But the real issue is not just getting approved, but finding a loan that is affordable and within your budget. The lower your credit score, the higher your interest rates will be. Zabritski suggested having a score of at least 700: “it opens many doors, and you will be more likely to get offers. If your score is higher than 720, you will often get the best offers available.”
Many credit scoring models allow shopping around for the perfect auto loan and count multiple inquiries that happen in a short period of time as a single hard inquiry on your credit report (having several hard inquiries on your report can harm your score). Prior to searching for a vehicle, look at your credit score and imagine what it may look like to a lender going through your application. There are sites that can keep you updated on your credit score. If you find your credit score is low, they can also help you determine a plan for increasing it.
When you’re ready to take the next step and apply for an auto loan, be sure to take your time and compare different offers to find the best one for you. And if you already have an experience of applying, share the wisdom in the comments below!