Cars are usually seen as a sign of status and also as a necessity, but when purchasing one, it is always a big decision that should be backed by some amount of planning and thinking about your pocket. One of the most crucial aspects of the whole process is the ability to qualify for the loan and the interest rates, which will be determined by the credit score, or the FICO automobile score which ranges between 250 and 900. Therefore, what FICO score is required to secure an auto loan approval with an affordable interest rate? Which are still not identified, let us have a look.
Why Credit Score Makes the Difference?
Anytime you fill out a car loan, the lenders are likely to retrieve your credit report and your score to determine your creditworthiness and whether they should offer you the loan or not. When it comes to credit scores, in most cases, the higher your score, the better interest rate a lender will give you because they consider you a low credit risk. It can prevent certain borrowers from qualifying for loans at all, let alone being granted any credit limit even if just starting.
The rate that one will pay towards the lifetime of an auto loan depends on the credit score, therefore it is financially advisable to check for such scores early and work towards improving on the bad scores. A point or two higher score can amount to thousands of dollars in possible interest rate savings even when you compare with banks with slightly lower interest rates.
Minimum FICO Scores Required
As a general guideline based on current lending standards:
• Any score beyond this range is regarded as very good to exceptional credit for a car loan. This will ensure that you get the best interest rate from most of the companies that offer credit, usually not exceeding 5%.
• A credit score between 661 and 679 is still considered good and you will be able to secure interest rates below 10% from most of the lending companies.
• Scores that range between 620-660 are considered fair or average but the good news is that there are lenders who can still offer loans. However, interest rates will be higher with lower maximum loan limits. Prepare the rate range from 10-20%.
• Having credit scores below 620 typically means one has to either rebuild credit or shop at a buy here pay here type dealer that while providing credit to lower scores charges steep rates. Credit card issuers and other significant creditors most probably will not issue credit with FICO below 620.
Terms of how credit score tiers affect the car loan
For instance, to show you how much the credit score impacts the cost of financing a car, let’s approximate the monthly payments on a $25,000 five-year car loan between the individual with a very good credit score of 720 against an individual with a fair credit score of 640.
FICO Score: 720
Interest Rate: 4.5%
Monthly Payment: $461
Total Interest Paid: $2,895
FICO Score: 640
Interest Rate: 15%
Monthly Payment: $565
Total Interest Paid: $8,747
As you can see, the higher interest rate that comes with a lower credit score means that the interest charges would be over $5,800 more than the lower credit score while having a slightly higher installment but for the same car loan amount. And rates could be over 20% with even lower credit scores.
Having good credit is therefore a great source of savings which makes it important when there is any major requirement of financing.
What One Needs to Do to Achieve a Credit Score to Buy a Car
If your credit score at present is not up to par with what most auto lenders expect, make sure to improve your rating before applying. Here are effective ways to raise your credit score to over 700+.
• About credit accounts, ensure that all credit accounts have been paid on time in the future.
•; Maintain balance below 30 percent on credit cards
• Dispute and rectify any inconsistencies with the credit reports that companies have prepared about you
• Be reluctant to make a new credit application
• Get permission to use an account that belongs to another person
Building good credit habits can help increase your credit scores over several months but not in a week. It is advised that you check at least a quarter so that you do not put yourself under the pressure of financing a car.
When your credit rating rises to one of the ‘very good’ or ‘exceptional’ categories, you can apply for auto financing and be certain that lenders will register affordable car loan approvals. However, one should be careful not to make the application too often or to allow an inquiry with a low score since this will result in bad credit.
Getting Pre-approval for Your Auto Loan
Once you have your credit score ready and set, one good strategy is to go shopping for cars after you have been pre-approved for an auto loan just as people go looking for houses after they have been pre-approved for a mortgage. This enables you to discern what vehicles you can afford and yet has an added advantage of bargaining power with the dealers since your financing is already in place.
On top, credit applications for pre-approval are mostly ‘soft’ pulls that don’t reduce your scores if done within the same period (14-45 days across bureaus). There is nothing wrong with applying to multiple lenders to compare the rates offered for the same because if you apply to several lenders, it should be immediately and only to the serious ones (not the websites you come across).
Key Takeaways
FICO score is perhaps the most influential factor in the number of approvals for auto loans and the interest rates charged. Credit scores of 680 or more are considered to receive the best terms whereas a credit score between 620 and 660 is still acceptable but not without higher rates and long restraints. It is always wise to build thin credit or financial habits because, in the long run, the savings made will suffice the entire car loan period.
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