Why It’s Important to Improve Your Credit Score Before Shopping for a Car Loan
When you are looking for a car loan, the one thing you need to keep in mind is your credit score. It is the primary thing lenders look at because the look at it as an indicator of your financial health and how likely you are to pay back the loan. So, although other documentation is used when processing a loan, the key ingredient – the one that will ultimately make the difference – is your credit score.
To get the best interest rates on a car loan, you want to have a credit score of at least 740. You can still get a loan with a score in the high 600s, but you are going to be paying a higher interest rate. For people with scores above 740, the average interest rate is around 3.2 percent. For scores between 680 and 740, the average rate is around 4.5 percent. This can result in a big difference between the amount of money you end up paying for the car. For example, a loan of $15,000 at 3.2 percent over four years you monthly payment will be $333 and the loan will cost you a total of $16,000 (more than $1,000 over the car’s original price)
But a $15,000 loan at 4.5 percent over four years will cost you $342 a month and $16,419 (almost $1,500 over the car’s original price and almost $500 more than what you’d pay at a lower interest rate).
Credit is simply an indicator of the amount of risk a lender is taking on when the lender issues a loan. The lender assumes that if your score is higher, there will be less risk – that you are more likely to pay back the loan.
You don’t want to apply for a loan without knowing your score, so you should check your score beforehand. You can do this online. There are many credit check companies on the Internet.
But you need to make sure the company you use is legitimate, and not a scamming operation.
One of the easiest ways to improve your score is to use your credit cards as little as possible. Also, make sure you make all of your credit card payments on time, every single month. Even just one late payment can have a negative impact on your score.
There are altogether five elements that go into a credit score. The most important of these is whether you make your payments on time. This accounts for about 35 percent of your score. If you do, you should have a good credit score. However, if you routinely miss payments, your score will drop.
Another big part of the score is the amount of debt you have. As you can guess, the more debt you carry, the lower your score.
The other less significant things that determine credit score are how long you have been building your credit, when you last made a credit application, and whether you have revolving or installment credit.
So work on making sure your credit score is as high as possible before shopping for a car loan. If you visit the PAACO Automotive Group when shopping for cars, we can finance you here!
Visit a PAACO location near you soon. For more information on your financing options, call us at 877-810-4555 to learn more.