Before purchasing a vehicle, it is a good idea to check what your credit score is, so you can get an idea of what auto loan options you will have available. There are several ways to rebuild a credit rating before taking out a loan, and some ways to do this include acquiring a secured credit card and paying off all existing debts on time.
Although many car dealerships will say they have no problem working with people who have bad credit, these individuals should still expect to receive higher interest rates on any loans. However, as long as you are prepared to make all payments on time, you can actually do a lot of good for your credit score. Here is what you need to know about these two subjects, so you can make an informed decision on an important purchase.
How Lenders Interpret the Score
A person’s credit score can fall anywhere between 300 and 850. Generally, an “excellent” score is considered anything above 720. This shows you are able to pay off debts on time, and auto lenders would be more than happy to work with you with this rating. A “good” score is anything between 690 and 719, and people in this range will still have an easy time with loans.
People with “fair” credit are those who fall in the range of 630 and 689. People here can begin to expect substantially higher interest rates on loans. Individuals with “poor” credit fall on the low end of the spectrum, and they may not be able to get loans at all.
Lenders View These Ratings Differently
Some lenders may only be able to work with consumers who have either good or excellent credit. They may not even consider extending a loan to someone who has poor credit because it demonstrates the person’s inability to make payments on time. However, other lenders are more forgiving. This is why it is a good idea for consumers to shop around to find the best rates for them.
How a Loan Will Impact Credit Score
An auto loan can be a great way to diversify a credit report, and you can gradually increase your score over time. Since you will need to make regular payments over the course of several years, you can demonstrate you are financially responsible enough to handle such payments. As a result, your score will increase over the years.
However, an auto loan can also significantly decrease your score if you ever fall behind on payments. Purchasing a car is a big investment. While establishing credit through an auto loan is a viable option, people need to make sure they will be capable of paying off the loan in the allotted amount of time before agreeing to anything.
Refinancing a Loan Can Help
In the event it appears as though a person will be unable to make the necessary payments initially agreed upon, then it would be worth it for the person to go back to the lender to potentially refinance the loan. This most often occurs when a person experiences a financial hardship. Losing a job or experiencing a sudden medical emergency can make it extremely difficult to make auto loan payments.
When this occurs, it is paramount to keep communication lines open with the lender. This will prevent any long-term issues, and it can help prevent a credit score from dropping too much. The person can go back to the lender to begin the process from square one and refinance the payments. The lender reviews these matters on a case-by-case basis. The lender will look at the person’s specific case and determine whether refinancing is the way to go moving forward.
Know How To Buy a Car While Keeping Your Credit Score in Check
It is important to be honest yourself when taking out an auto loan. You do not want to borrow outside of your means. Many people fall into the trap of purchasing a car they fall in love with but simply do not have the capability to make the payments on time. It is critical for consumers to purchase vehicles they can afford with reasonable loan terms. As long as you make all payments on time, taking out a loan can do wonders for your overall score.