Loans can be your best friend when you are shopping for cars. They make vehicle purchases more feasible and affordable, but different people may qualify for different loan terms. Credit scores are one reason. For example, a higher credit score can lower your interest rates and reduce the amount of your monthly payment.
Approval
If you want a loan for a new CDJR for sale, your credit score determines whether you get approved at all. Fortunately, many people qualify.
However, if your score is low enough (under 575, generally), you might not qualify for a loan or only with lenders who deal in subprime loans.
Interest Rate
Lenders see people with higher credit scores as more likely to make their loan payments. Thus, they are less of a risk to lenders. The higher your credit score, the lower your interest rate should be, and the more money you should save over the life of your car loan.
If you have a lower credit score, you can make a car loan more affordable if you have the ability to wait a year or so before making the purchase. Use the time to keep your credit utilization ratio under 30%, pay past-due payments, apply for secured cards if necessary, and make all bill payments on time. A score of 680 or higher should get you the lowest interest rates.
Length of Loan, Loan Amount, and Fees
The better your credit is, the more flexibility you can expect to have in choosing a longer loan term. Similarly, you can usually qualify for higher loan amounts with a higher credit score. If your credit score is low, you may have to accept a shorter loan term and for a smaller amount.
Fees are another cost of car loans, and they can change based on your credit score. If you are a borrower with a lower credit score, you may have to pay higher loan origination fees, among other fees or charges.
Down Payment Amount
Lenders may not require you to put down as much money if you have a higher credit score. They feel more comfortable letting you do this since you have a history of making loan payments on time.
Financial experts recommend down payments of at least 10% to 20%, but you could put down less with many lenders if you have a sparkling credit score. Sometimes, lenders won’t even require a down payment. You would be paying more interest over the life of the loan, though, since the balance you owe is larger.
Monthly Payments
Your credit score, interest rate, and loan term determine your required monthly payment amount. You should expect lower monthly payments the better your credit score is.
Fortunately, you are probably not stuck with your original car loan if you steadily improve your credit score since taking out the loan. You can refinance a loan to get a better interest rate and other terms for a lower monthly payment. Refinancing does come with its own fees and other charges, though, so make sure the numbers come out in your favor.
Conclusion
If you manage your credit responsibly, you can make car ownership more affordable. Regardless of your credit score and loan terms, on-time payments may help you qualify for even better loan terms in the future.
