Your Guide to Car Loans and Credit Score
When you need to get a car loan your credit score is an important consideration. Like any financing, your score not only affects the possibility of borrowing money for a car, but your interest rate is likely to be affected too.
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 Your Credit Record
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, you first need to know that credit scores are divided into 5 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) - You will be considered trustworthy, and you will have options.
- Good (622 - 725) - You still have a good chance of approval, and interest rates will still be relatively low.
- Fair (510 - 621) - This is considered negative, and while you may still be approved, there will be additional requirements.
- Poor (0 - 509) - In this range, you are considered high risk, so the likelihood of approval is low.
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. Those who have borrowed smaller amounts to get by and who are late with their payments are bound to rank lower.
1. Type and Number of Enquiries
If you have more than six enquiries between 3 and 6 months, this is considered a busy file. Too many enquiries mean:
- Your rank will reduce.
- You will be prevented from borrowing.
- Even if you do not proceed with a credit enquiry it will be listed 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 be listed but will be shown as paid.
4. Debt Level
Information considered will include how much money you are borrowing currently and how it will affect your ability to make more payments if your car loan is approved.
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 Credit Score on a Car Loan Approval
As we have stated throughout, 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 credit scores and how they work, 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 or a secured personal 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!
About the author
Peter Watman has extensive finance and automotive experience having worked in both industries for over 30 years. Peter founded AAA Finance and Insurance in 2012. He leads an experienced team that provides quick and easy finance solutions along with exceptional customer service.