Thinking About Getting a Car? What You Need to Know About Car Financing

By Myles Leva

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Last Updated: March 9, 2022

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After buying a house, buying a car is one of the more expensive decisions in most peoples’ lives. A car loan is necessary in most cases, unless you’re buying an old used car or you have saved up enough to pay upfront.

Aside from insurance and the various maintenance expenses, you will have to pay for, financing is the first major car expense. But the deal you get with car financing will depend on factors such as:

  • The specifications of the car itself
  • The age and mileage of the car
  • Your personal credit score
  • Your debt-to-income ratio
  • Other creditworthiness factors

To provide a complete understanding of car financing, we will go over:

  • Creditworthiness and the auto loan industry
  • Minimum credit score requirements
  • New vs used car financing
  • Why you should always use a car payment calculator

 

Creditworthiness For Car Financing

Your credit score is the first creditworthiness metric that lenders look at. The higher your credit score goes, the better your interest rates and terms. You can also expect to get approved for higher loan balances if you have a high credit score.

Besides credit score, lenders look at a few other factors, including:

  • Income
  • Employment status
  • Debt-to-income ratio
  • Credit report (for delinquencies, late payments, past bankruptcies, etc.)
  • Fixed expenses, especially rent/mortgage

When car lenders look at these factors, they are simply undergoing a risk analysis on you. The better all of the above factors look to them, the more they will feel they can trust you to pay back in full and on time, and vice-versa. Thus, the less risky you appear, the better your potential options will be.

3 Critical Ways Credit Scores Can Be Obstacles When Purchasing Real Estate

 

What does your credit score need to be to get a car?

Overall, if you have a credit score of over 670, you should have no issue getting approved for a standard car loan. The FICO model, which is used by most lenders, considers a score of over 670 “good”. If you land in the “exceptional” range, lenders should not hesitate at all to lend you money for a car.

If you don’t have good credit, you should still be able to get a car loan. In fact, many lenders specialize in bad credit car loans. However, you can expect them to offer you interest rates far higher than if you had good credit.

So, while you can almost always qualify for some kind of car financing, you should be aware of how your credit score affects:

  • The range of lenders willing to lend you money
  • The rates and terms that the lenders who would lend you money are willing to offer

Experian has provided the average Annual Percentage Rates (APRs) for credit score ranges (Q4, 2021).

 

Credit Score

Average New Car APR

Average Used Car APR

300-500

14.59%

20.58%

501-600

11.03%

17.11%

601-660

6.61%

10.49%

661-780

3.48%

5.49%

781-850

2.34%

3.66%

 

Of course, these figures change quarter by quarter, but it should give you an idea of what to expect.

 

Is it hard to get a car loan?

In general, no.

If you have a subprime credit score, however, you can expect it to be hard to get a good deal on a car loan. As we’ve gone over, the differences in rates you can qualify for vary widely depending on your credit score range. Then, lenders will also factor in the other creditworthiness factors.

 

What is the best way to get approved for a car loan?

If you aren’t in a big rush to own a car, it pays to maximize your credit score before applying for a car loan.

Bad credit car finance is a difficult and pricy space to navigate. The difference in interest rates between deep subprime and prime credit scores is significant. There are a few things you can do to get approved for an ideal car loan.

 

Pay Off Large Debts

This kills two birds with one stone.

First, paying off large debts will have a positive impact on your credit score. Second, it will grant you a better debt-to-income ratio. Because debt-to-income ratios are significant to lenders, reducing your overall debt before applying for a car loan can save you a lot of money.

 

Control Debts Over Time

If you have a bad credit score, you can increase it over time by starting to make more timely payments.

 

Get A Cosigner

This is also a great idea if you have bad credit. If you can get a family member or close friend who has good credit to cosign the loan, you can qualify for better loans.

Of course, your cosigner will be partially responsible for your loan. This lowers the risk to your lender. However, your cosigner will be stuck with the bill and the consequences that are incurred should you be unable to pay the lender back as agreed.

 

 

Conclusions: Use A Car Loan Calculator Today

A car loan calculator, also known as a car payment calculator, can help you understand what you’re getting into.

Car loan calculators are simple. You just provide your basic financial situation (credit score, debt, etc.), and the calculator estimates the rates you can qualify for.

Oftentimes, the sites that provide these calculators are affiliated with lenders, meaning they will show you which lenders they work with that would likely accept your loan application. You aren’t obliged to take a loan when using a calculator, but you should understand this fact.

Regardless of what your credit score is, it’s always better to comparison shop. Look for different lenders and perhaps consult with different car loan brokers. Doing so is normally free, and your credit score isn’t affected until you make a formal loan application.

Photo by Garvin St. Villier from Pexels

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