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3 min read Published February 10, 2023
Written by Allison Martin Written by
Allison Martin’s career started over 10 years prior to that as a digital content strategist. She’s published in numerous prestigious financial publications, including The Wall Street Journal, MSN Money, MoneyTalksNews , Investopedia, Experian and Credit.com.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping their readers feel confident to control their finances by providing precise, well-researched and well-documented facts that break down complex topics into manageable bites.
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You’re looking to secure the best deal on an auto loan but be aware that it may be challenging due to your credit health. On average, those with strong credit will be offered the best rates. For example, according to , those with a score of 300 to 500 will receive the average rate of 19.81 percent APR for the purchase of a used car. On the other hand, those who have a credit score of 661 to 780 have rates of 5.47 percent. If you are able to hold the purchase the car, you can employ strategies to build your credit before purchasing a vehicle. Be aware that your lender will likely determine your ability to repay the loan by calculating your debt-to-income ratio. You should consider paying off any current debts to lower your DTI ratio, in addition to other ways to improve the credit rating. Four ways to improve your credit prior to purchasing an automobile. Your credit score is an important factor when applying the application process for a car loan. Therefore, it is important to get your credit in tip-top shape before you apply, starting with these actionable tips. 1. Correct any mistakes that appear on your credit file Start by . Review the contents for accuracy and highlight any mistakes you find which could bring your score down. For instance, maybe your report says you didn’t make a payment when you actually paid in time. After that, you can submit a dispute via mail, phone or online to the major credit bureaus — Experian, TransUnion or Equifax and report the incorrect details. The credit reporting agency will then contact your creditor, or lender to further investigate your dispute. If the information contained in your report isn’t verifiable the report will be deleted, and your score could be improved. 2. Pay your bills on time Payment history is a major factor in 35 % of the FICO credit score. If your credit card or loan account is thirty or more calendar days in arrears, a lender or creditor could be notified of the delinquency as well as your score may take a hit. However, if you pay on time payments on your credit account and your score improves over time. It’s equally important to bring any past-due accounts current to avoid further collection activities and damage on your score. 3. Pay down your credit card debts Your credit card balances will be reduced. FICO credit-scoring model favors consumers that responsibly manage their obligations to repay their debts. Consequently the amount you owe is the second largest part to your score. , or the percentage of your credit line you’re currently using, is the second largest component of your credit score. Creditors want to observe your credit utilization as or below 30 percent. If it is higher, you should work to pay off your balances, which could improve your credit score. This will allow you to qualify for a low interest rate on an auto loan. 4. Beware of applying for credit with new accounts. Every time you apply for credit, a hard inquiry is generated which can lower the credit score of a few points. Even though the impact is temporary, multiple inquiries in a short period could hurt your score. However, a small drop of your credit rating could result in an increase in interest rates- and consequently could result in a cost of several hundred or even thousands or more dollars. Aim to keep shopping within the two-week time frame. What is the role of credit score? Understanding it will help you effectively work to improve it. Payment history: Making up 35 percent of your score it includes information about your payments, delinquencies and amount of accounts. Credit utilization ratio: 30 percent. This is the amount you owe on your limit on credit. Credit history length: 15 percent. The longer you’ve held credit more, the better. New credit 10. Credit bureaus look at how many accounts you have open in recent months. The opening of too many accounts could lower your score. Credit mix 10 percent. A variety of credit — including loans, cards loans and retail accounts will work to your advantage here. Why your credit score matters when buying a brand new car. Lenders make use of your credit score as a way to assess your creditworthiness as well as the probability that you’ll default on your loan payment. You pose less risk to the lender if you have good or excellent credit. This means that you will generally be rewarded with an interest rate that is lower . With a lower interest rate the amount you pay each month will be less, as well as your loan will be more affordable overall. However, they are generally higher. Bad credit car loan options If you’re for the car loan, there are . For instance, buy-here and pay-here dealerships cater to borrowers with credit challenges — however, they typically charge high interest rates and should only be considered as a last resort. Consider reaching out to your credit union or bank to see whether they’ll approve you for a loan in light of the strength of your relationship. Online lenders can also be a good match, and many feature an application for prequalification on their website , so you can check if are eligible and view potential loan rates. The bottom line: A good credit score, a stable source of income, and the ability to reduce your debt-to-income ratio can provide you with a favorable rate in the form of an auto loan. So, it’s worth improving your credit health before you apply. If you’re ready apply, you must find the best options to suit your needs. Related Articles:
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Written by
Allison Martin’s work started over 10 years ago as a digital content strategist, and she’s since been published in several leading financial outlets such as The Wall Street Journal, MSN Money, MoneyTalksNews , Investopedia, Experian and Credit.com.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to manage their finances with concise, well-studied and well-researched content that breaks down otherwise complex subjects into bite-sized pieces.
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