Credit has a tremendous impact on auto financing. Even when your credit is less than perfect, there may be options for you to get a car. But, there are some steps you need to take in order to prepare yourself for auto financing. To understand how credit affects your car buying experience, you must first understand what credit is and your individual credit situation.
Credit is a system wherein a person has the ability to get goods or services before paying for them. It’s based on a principal of trust, and lenders use a person’s individual credit to rank their creditworthiness – or how likely they are to responsibly pay back any loan given for goods and services they’re obtaining.
Credit Score vs. Credit Report
When you’re dealing with credit, it’s important to know the difference between a credit score, and a credit report. Both of these are important when you’re considering auto financing, because lenders use them both to determine what kind of loan you qualify for.
Credit scores are three-digit numbers that rank an individual on their creditworthiness. These scores help to determine if you’ll get approved for a loan, what your interest rate will be, and, in a roundabout way, what type of lender you should apply with.
FICO credit scores are the most commonly used among lenders and range from 300 to 850. They’re broken down into ranges from excellent to bad:
- Excellent – 750 and above
- Good – 700 to 749
- Fair – 650 to 699
- Poor – 550 to 649
- Bad – 550 and below
Though FICO is the most common credit scoring model used, there are other models produced and used by individual credit bureaus. VantageScore, which is used by TransUnion, also ranges from 300 to 850. But, the Equifax Credit Score and the Experian National Equivalency Score use different number ranges: 280 to 850 and 360 to 840, respectively.
On the other hand, credit reports are a summary of everything in your life that involves using credit – from applying for a credit card to purchasing a refrigerator, buying a house, or financing a car. A credit report lets a lender know how you utilize credit and how responsible you’ve been with it in the past.
Credit scores are based on what’s in your credit reports. Credit reports weigh your information in five categories, with each category worth a certain percentage of the whole score. Both FICO and VantageScore use this basic model to calculate credit scores. According to FICO, the calculation for their score breaks down as follows:
- Payment history: 35 percent – This is how well you’ve handled credit in the past. Everything from late utility bill payments to repossession shows up here. But, so do positive on-time payments that are reported to the credit bureaus.
- Credit utilization: 30 percent – This shows a lender how much of your available credit you’re using, and can be found by taking the sum of all of your credit card balances and dividing it by the total of your credit card limits. If you keep all your credit cards maxed out, and only pay the minimum required each month, it’ll be reflected here. Lenders like to see your credit utilization at 30 percent or below.
- Credit age: 15 percent – This shows how long you’ve been using credit for, from the age of your oldest account. It’s good to keep long-standing credit around to show that you’re responsible not just on new accounts, but over the life of your credit as well.
- Types of credit: 10 percent – This shows a lender what mix of credit you’re using. They like to see a blend of revolving credit (credit cards) and installment credit (mortgages, loans). Adding a new line of credit that differs from the majority of the credit you hold helps diversify your credit reports.
- Inquiries or new credit: 10 percent – Though it’s good to diversify your credit by occasionally adding a new line of credit, it’s not such a good idea to open several lines of credit at once, just because you can. This could be a red flag for lenders.
Understanding Your Individual Credit
An important first step when you’re looking for a car loan is to pull your credit reports and view at least one of your credit scores, so that you know what to expect once you get to the dealership. You can get one of your credit scores for free from any number of online sources, such as Discover Card’s Credit Scorecard or Credit Karma.
You can also get your credit reports for free. You’re entitled to a complimentary copy of your credit report from each of the three national bureaus – Experian, TransUnion, and Equifax – once every 12 months. You can request these by visiting AnnualCreditReport.com.
Once you get your reports, look them over to ensure accuracy. Anything you find that’s incorrect, or any negative marks that don’t belong, should be reported to the agency you’ve obtained the report from. This is known as a dispute, and the credit bureau will investigate and can remove the incorrect information from your report. When it comes to keeping your credit healthy, this is a step you should always take. The simple act of removing inaccurate negative marks from your credit report has the ability to result in higher credit scores. Keep in mind that most black marks, such as bankruptcies or repossessions, should fall off your credit reports after seven to 10 years.
Another thing to keep in mind is that no two person’s credit are exactly alike. Your credit profile is unique to you, and it should be treated as such when you’re using it. Don’t let anyone define your credit for you. If you know your credit, and what’s typically offered to other people with similar credit scores, you’ll have a much better leg to stand on when financing a vehicle.
How Credit Affects Auto Financing
When it comes to using credit, there’s specific importance placed on different types of credit by different types of lenders. Most automotive lenders use an auto-enhanced FICO credit score as a basis for loan approval. This is a credit score that places more importance on how you’ve paid your auto loans. When you get your credit score and report, you won’t likely see your auto-enhanced FICO score.
When a lender gets your credit score, they look at where you fall in relation to typical auto financing credit ranges. These credit ranges – from super prime to deep subprime – determine what type of lender should be able to extend you an auto financing offer. According to Experian, auto financing credit ranges are:
- Super prime – 781 to 850
- Prime – 661 to 780
- Nonprime – 601 to 660
- Subprime – 501 to 600
- Deep Subprime – 300 to 500
When your credit score falls into the top of the auto financing range, you have the ability and freedom to choose what type of vehicle you’re financing, and enjoy low interest rates while doing so. Prime and super prime consumers are also able to choose where their loan comes from, and should be able to find financing with ease – including from direct lending sources like banks and credit unions, which is something that’s not easily available to consumers in all credit ranges.
Non-prime consumers, on the other hand, receive higher interest rates when they finance a vehicle. While they may not be able to obtain direct lending from a bank with ease, they may still be able to get financed directly if they’re a member in good standing of a local bank or credit union. If your credit falls in this range, you can enjoy more freedom to choose the type of dealer and lender than people with worse credit.
Borrowers that have credit in the subprime and deep subprime ranges typically don’t qualify for direct lending, and also see the highest interest rates when financing a vehicle. As such, the lending process becomes more difficult and has more qualifications that must be met when you’re struggling with credit issues. But difficult doesn’t equal impossible. There are options for nearly everyone, at every credit level, which is why getting to know your credit is so important.
Finding the Right Financing for You
If your credit is on the lower end of the spectrum, chances are you’ll need to visit a special finance dealer to apply for a loan from a subprime lender. These lenders have the ability to look beyond credit scores, and approve people based on factors such as income, employment, and residency. Finding one of these dealers can sometimes be a challenge, but that’s where we come in.
Here at The Car Connection, we work with a nationwide network of special finance dealerships that have the lending specialists prepared to help people with bad credit, no credit, bankruptcy, and more. Don’t hesitate any longer if you need a vehicle and have low credit. Fill out our free and easy online auto loan request form now, and we’ll get to work matching you with a local car dealer today.