When you need to get a car loan your credit score is an important consideration. Like any financing, your score not only affects your ability to borrow money for a car, but it also impacts your interest rate.
It is no secret that a good credit score will ensure you get a low interest rate car loan approval. However, did you know that you could be denied the finance you need without this good rating.
Understanding Car Loans and Credit Score
We’ve determined so far that your rating will affect you in achieving a car loan approval, but do you understand your credit record and score?
When you find out your number, it will be anywhere between 0-1200. If the number is high, it means you have a strong record and are likely to repay your debts. Information gathered doesn’t just include credit cards and prior borrowing. It also includes utilities – power, gas, water, internet, and phone plans.
Maintaining a good score is essential because it determines whether anyone is willing to take the risk of lending you money.
When breaking down how this works, start by understanding that lenders divide credit scores into five bands. These are based on the risk level of an adverse event occurring. This could be anything from a court judgement, default, or late payment. The following rankings are used by Equifax:
- Excellent (833 – 1200) – This means you are low risk, and getting approval will be a straightforward process.
- Very good (726 – 832) – Lenders consider you trustworthy and offer you a variety of finance options.
- Good (622 – 725) – You still have a good chance of approval, and interest rates will still be relatively low.
- Fair (510 – 621) – Lenders consider this negative, and while they may still approve you, they will impose additional requirements.
- Poor (0 – 509) – Lenders consider you high risk in this range, so they are less likely to approve your application.
You can easily access your file through a provider like Equifax, Experian or Illion.
Aspects That Determine a Credit Score
Five components determine your credit history and ultimately your credit score. As a general rule, loan repayments made on time to mainstream lenders are more likely to have a positive impact on your credit history. Borrowers who take out small loans to get by and miss payments will rank lower.
1. Type and Number of Enquiries
If you make more than six inquiries within three to six months, lenders consider your file busy. Too many enquiries mean:
- Your rank will reduce.
- Lenders will prevent you from borrowing.
- Even if you don’t proceed with a credit inquiry, it will appear on your credit file.
TIP: Avoid inexperienced brokers and dealerships with limited lenders that can make unnecessary credit file enquires that lower your credit score.
2. History of Repayment
How you keep up with your payments is vital because being late with them have a negative impact. Consider:
- Are repayments made on time?
- Do utilities get paid by the due date?
3. Adverse Events
Do you have any defaults, bankruptcies, or debt agreements? These stay on your credit file for 5 to 7 years. Even if you pay the default, it will still appear on your credit file but will be marked as paid.
4. Debt Level
Lenders will consider how much money you are currently borrowing and how it will impact your ability to make additional payments if they approve your car loan.
5. Previous Finance
- The amount of money you have previously borrowed and when?
- Type of lender you have previously borrowed from – banks or short term payday lenders?
Tips for Improving Your Credit Score
If you want to save money on interest rates once you have had a car loan approved, it’s worth taking the time to increase your credit score. If you need to get a vehicle straight away, down the track, you can refinance at a lower interest rate once you have made improvements. The following tips will help you get a better ranking moving forward:
- Make payments on time.
- Use mainstream lenders when possible.
- Fix mistakes on your file.
- Limit enquiries into your file.
Effects of car loans and credit scores
As discussed above, a high score is advantageous as it means you are considered low risk. Lenders will want to offer you loans with favourable interest rates.
The opposite is true of lower numbers, where you are considered a risk, and you won’t have as many companies willing to lend to you. When they do, the interest rates will be higher.
You need to factor in that there isn’t a universal number in Australia to achieve a car finance approval. Generally, scores below 400 will have less in the pool of lenders and are often declined. Each lender has its own criteria they consider when assessing a loan application. These criteria can change on a daily and weekly basis. This is why you need an experienced finance broker in your corner.
Helping you Get Approved While Avoiding Unnecessary Enquiries
Now that you have a greater understanding of car loans and credit score, it’s time to find the right car loan for you. Whether you’re self employed or a small business owner chasing a no doc car loan or a low doc car loan. Or a wage earner wanting a secured car loan we have a lender to suit you.
At AAA Finance we have a team of highly experienced finance brokers who deal with over 40 different lenders on a daily basis. Unlike others, we DO NOT make any unnecessary credit file enquires and therefore do not negatively affect your credit file. AAA Finance can help you get your car loan approved at the best rate with our quick and easy finance solutions. Call 07 5496 1222 to experience the AAA different today!
