Bad credit should not hinder you from owning your dream car. Even though a higher credit score can give you a lower interest rate, some car dealers are still willing to sell cars even to customers with low credit ratings.
Your credit history is a key factor in getting a lender’s nod for a car loan. Besides that, your credit card determines the interest cost you’ll pay. First, you need to know that lenders often associate bad credit with late payments, bankruptcy, high debt, and defaulting previous loan terms.
All the same, a low credit score should not prevent you from getting a new set of wheels. There are two things you need to know — you’ll have to shop differently, and be prepared to pay a bit more. It’s equally important to stay informed to avoid unnecessary exploitation.
How much credit score do you need?
The average credit score for new car loans is around 715. If you’re shopping for a used vehicle, such as Skoda used cars, your average credit score should be around 662. But you’ll be glad to know that even borrowers with a credit score lower than 600 still end up approved, as confirmed by a report from Experian. Shopping for used cars, you are looking at rates around 6.5% with a credit score lower than 700. On the other hand, if your credit score is in the mid-500s, the rates might shoot to 17% or more.
Overall, your monthly payment will go up with a lower score, while a buyer with a better score would pay less on the same loan for the same period. In most cases, a bad score also translates into higher car insurance rates.
How car loans work
There are various types of car loans on offer, so it often depends on your selection and the car you intend to buy. Usually, you’ll go through the following steps:
1. Application for car financing
Once you select the right financing package, the next step is to apply for the loan. In places such as New Zealand, you need your personal and financial details for unsecured loans. For secured loans, you’ll also need information about the car you intend to purchase.
2. Loan preapproval
After the application, your lender will scrutinize the details and decide. Again in New Zealand, for example, a car finance approval IS often given on the same day or within ten days. Some lenders give conditional approval, stating the amount you qualify for, so you know your limitations.
3. Purchasing the car
Once you get preapproved, you may shop for your car with confidence. If you’re buying from a private owner, your lender can pay directly to the seller’s account or you can pay with a cheque. If you’re using a dealership, your lender can transfer funds directly to the dealership’s account. For unsecured loans, you make the payment arrangements yourself.
Importantly, before you sign up for a car loan, you should shop around and compare offers from various lenders. Read the fine print, and understand everything that comes with each package. Choose what works for you. Good luck with your car financing shopping!