Is it time for a new car? You may have started searching for vehicles you like and found several options. You may have even test-driven a few.
Now you are wondering how to go about building a payment plan for your new ride. If you need financing, you should understand how your credit score can impact your loan terms.
Factors That Impact Your Auto Loan
After you find your new BMW for sale, you are ready to work on financing. Several factors impact your ability to get a loan and improve your loan terms. Your credit score is a major factor, but so is the age of the vehicle, loan term, downpayment, credit utilization rate, and amount financed.
How Credit Score Affects Loan Approval
Your credit score can impact whether a finance company approves your loan. These companies evaluate the risk of delinquency or default based on your score. Although no universal credit score for approval exists, each lender likely has a standard it follows. Your personal bank may approve your loan if you have a 500 score, but many financiers require a score above 600.
How Credit Score Impacts Interest Rate
If your credit score is above 800, you have excellent credit. With a score like this, you may be eligible for zero-interest loans. If your score is 740 to 800, it is very good. You may still qualify for a zero-interest loan, but you are more likely to settle around the prime rate.
A good score is between 670 and 740, while a score between 580 and 670 is fair. Anything below 580 is a poor credit score and may result in a very high rate. As your score decreases, your interest rate increases. Your financier should have a loan APR chart based on your FICO score that will guide you through your interest rate based on your credit score.
How Credit Score Influences Down Payment
If you have an excellent credit score, you may qualify for loans with no down payment. This is important because the first few years have the greatest depreciation for new cars, putting you upside down on your loan without a down payment.
As your credit score decreases, so does the amount a bank may require for your down payment. If you have a low score, you may have to provide up to 20% of the loan cost in a down payment, especially if you purchase a new vehicle.
Tips for Improving Your Credit Score
You can follow a few strategies to improve your credit score. First, do not miss any payments on your existing loans, credit cards, or utility bills. Also, reduce your credit utilization rate to below 30%. One way you can do this quickly includes requesting credit limit increases.
If you have past due accounts, get caught up, and pay off any bills in collections. Avoid submitting credit applications and opening new credit accounts. Also, search for and fix any errors on your credit report.
Preparing for Your Auto Loan
As you prepare to purchase your new vehicle, get your credit in order. Do your due diligence and find the right financier and loan for you.
