Do you feel uncertain about the new three credit checks and scores that car dealers use when it comes to getting a car loan?
You’re not alone! Many potential buyers don’t know exactly which credit scores the auto lenders look at and this lack of knowledge can make shopping for a new or pre-owned vehicle even more intimidating.
In this post, we’ll take an in-depth look at exactly which score is used by car dealers so that you can feel confident when it comes time to apply for financing.
Understanding The Credit Scoring Model and How Car Dealers Use Them
Many of us are no strangers to credit card balances or the mysterious numbers that show up on a credit report.
Credit scores have an enormous influence when it comes to borrowing money from auto lenders, so it pays (literally) to understand credit scoring model how they work.
But did you know that car dealerships often check your credit scores as well?
When buying a car, dealers will take your score into account and possibly extend better financing options based on your score.
After all, lenders want to make sure you’ll be able to pay any car loans – the the higher score on your credit number, the more likely it is that you’ll be able to do so.
If your score is high enough, you may even find yourself in line for some amazing deals – so next time you’re out shopping for a new ride, don’t forget to look over those digits before signing on the dotted line!
What is a FICO Score and Where to Find It From Major Credit Bureaus
A FICO Score is a number that reflects the amount of trust auto lender and creditors have in your ability to pay back car loans, and ranges from 300 to 850.
Think of it as the ultimate ‘report card’ for managing your finances – higher scores often correspond with less risk and more favorable car loan terms.
Regularly checking your FICO Score can be helpful in understanding your financial history, and where you may need to improve.
To find out your score, you’ll either want to ask your credit card issuer, or you may be able to access it online through credit scoring websites such as MyScoreIQ or Credit Karma.
It’s also important to keep in mind that these services use other credit scores and scoring models and their own methods for assigning scores; they’re not always identical to what creditors look at when they calculate your creditworthiness.
Different Types of Three Major Credit Bureaus Scores Used by Car Dealers
Car dealerships use a range of credit scores when assessing auto loan applications.
Your FICO score is the one you’re probably most familiar with, but there are alternate versions that dealers may use for a car loan.
This auto score is called your FICO auto score.
Experian and Equifax offer different credit analyses to auto lenders, though they are all based on similar criteria like payment history, credit utilization, types of credit bureau, of the credit accounts used, etc.
With so many variables in play, it can be hard to suss out exactly which credit score or ones apply for each customer — but the car dealership’s financing team will do this work for you and help get you into the perfect vehicle!
The Impact of Credit History on Car Loan Purchases
When searching for a vehicle, your credit card debt history plays a large role.
Many car dealerships and auto loan companies look closely at an individual’s credit score when providing financing for auto loans.
A good credit score helps bring down the interest rate of an auto loan, making it easier to purchase a vehicle with low credit score an affordable payment plan.
However, those with bad credit or no established history may find car buying more difficult and costly due to higher interest rates attached to their loan.
Even if they do manage to be approved on some terms, they may still have limited options.
Looking into your score before researching cars is always a smart move as it provides helpful insight into what you can qualify for and will ultimately save time in the long run.
Tips for Improving Your Credit Score Before Buying a Car
If you’re in the market for a new car, one of the most important steps you can take is to ensure your credit score is in good health.
A good credit score will help you qualify for more financing options, better rates, and more favorable terms. Improving your credit score takes time and effort, but it’s absolutely worth it when you go to purchase your dream car.
To make sure you’re getting the best possible loan terms, start by gathering your recent credit reports and current scores – that way, you can identify any areas where you could use improvement.
Then focus on paying down high-balance debts as soon as possible; track your progress along the way so that you know what kind of shape your credit is in when it comes time to begin loan shopping.
Finally, be sure to stay on top of all payments going forward – making regular, timely payments is essential if you want to keep your future credit healthy and get the best deals from lenders.
How to Get Pre-Approved for an Auto Loan Before Shopping Around
Shopping around for an auto loan can be a daunting process, full of confusing options and terms.
But there’s a way you can make the experience much simpler: get pre-approved before you start learning all the lingo.
Pre-approval will help you save time in the long run because it narrows down your options, and allows you to focus on what really matters – the car itself!
Getting pre-approved is generally a speedy process and only requires a few pieces of information from you.
A good starting point is to speak to local auto lenders that specialize in auto financing, as they know all of the latest incentives which could save you car dealership some major money!
Plus, they have your best interests at heart, so discussing pre-approval with them is often as educational as it is helpful.
How Multiple Loan Applications Impact Your Credit Score
When applying for car loans, many potential buyers often apply at multiple places to get the best interest rate. However, what they don’t realize is that multiple hard inquiries on your credit report in a short amount of time can potentially lower your credit score.
Each time you apply for a new loan, the lender will perform a hard inquiry on your credit report to assess your creditworthiness. While a single hard inquiry may only slightly affect your score, multiple hard inquiries on multiple credit scores within a short time period can lead to a more significant drop in your credit score.
However, FICO understands that rate shopping is a natural part of the lending process. Therefore, multiple inquiries for the same type of loan within a certain time period (usually 14-45 days) are usually treated as a single inquiry in your FICO Score calculation. This time period can vary depending on the version of FICO Score being used.
So, if you’re shopping for a car loan, it’s advisable to get all your applications in within a short period of time to minimize the impact on your credit score.
Understanding the Importance of a Down Payment
Down payments can be a crucial factor in the auto financing process. Providing a down payment can reduce the total amount of interest you’ll pay over the life of the car loan, and it can also potentially lower your monthly payments. Additionally, a down payment could improve your chances of approval for personal loans, especially if your credit is less than perfect.
While a typical down payment for a new car can range from 10% to 20% of the car’s price, the amount that’s right for you will depend on several factors, such as the car’s price, your budget, your credit score, and the terms of your loan. If possible, aim to put down 20% or more to protect against depreciation, which happens quickly with new vehicles.
The Implication of the Loan Term Length
Another significant consideration when purchasing a car is the loan term length. Auto loans typically range from 24 to 72 months, but it’s important to remember that while longer auto loan payments and terms might make the monthly payment more affordable, they also mean you’ll be paying more interest over the life of the loan.
On the other hand, shorter-term loans may come with higher monthly payments, but you’ll pay less in interest over time. The length of your loan should be balanced against your monthly budget, your down payment, your interest rate, and the depreciation rate of the car.
Remember, owing more on your loan than what your car is worth (being “underwater” on your loan payments) can lead to financial troubles if you need to sell your car or if it’s totaled in an accident. Therefore, understanding the implications of your loan term length is crucial when financing a car.
By considering these three additional aspects—multiple loan applications, down payments, and loan term length—you can feel more confident when navigating the car-buying process. It’s all about finding a balance that suits your budget, your lifestyle, and your credit health. With proper planning and a better understanding of auto financing, you’ll be well-equipped to make an informed decision on your next vehicle purchase.
In Conclusion
Understanding the impact of your credit score on purchasing a car can help you make more informed decisions, and ultimately save you time and money.
Before you hit the dealership, take the time to understand what type of credit score is used to determine your loan eligibility, for an auto loan.
Pull your own FICO credit score and a free credit score from a reputable source so that you know where you stand financially.
Knowing what kind of credit score car dealerships use, understanding how credit history is taken into account for car purchases, and improving your credit score before applying for an auto loan are all key steps in getting pre-approved and finding the right vehicle at the best prices for available credit you.
With a little research ahead of time, you’ll be sure to have a smooth car-buying experience!
Credit Scores That Car Dealers Use
