Credit Scores for Car Loans – What You Need to Know
Purchasing a car is a large financial burden, particularly if the vehicle is brand new, which is why many people require some form of loan in order to help offset the costs. However, credit scores for car loans will vary depending upon the provider and their specific rules, with many taking on those with poor or no credit.
We explain the key points you should consider with regard to your credit rating before you begin filling out any car finance applications.
Credit Scores for Car Loans
What is a credit score?
Your credit score, or credit rating, is a number given to you based on your likelihood of paying back the credit you owe. Finance lenders, such as credit card companies, banks and car finance providers will be able to calculate your credit score by looking at your credit history in order to determine how risky you are perceived to be as a borrower. This helps them decide whether to grant a loan to you or not.
Generally, the higher your credit score is, the more likely you are to receive a loan and be accepted for credit, and the better your lending rates will typically be.
Why does my credit rating affect whether I can take out a car loan?
Your credit rating is used to determine how safe of a borrower you are perceived to be. This is the loan company’s way of protecting themselves from people who will not be able to make repayments.
When filling out applications for car loans, the lender will be able to see your credit history, which allows them to determine whether you are likely to repay the loan in future based on your past credit behaviour and whether you are good at managing your debts.
Things taken into account include; how often an applicant has applied for credit, whether payments are made on time, and if anything is owed. Points will generally be lost for things like late payments and defaults, while you will look better if you make payments on time, are on the electoral register and have a steady source of income.
Of course, there are many reasons as to why someone might have a poor credit score and many modern lenders will be willing to take into consideration a range of personal factors when deciding whether to offer you a loan.
That being said, people with bad credit ratings may find themselves on the receiving end of a poor loan contract, or one with a particularly high interest rate, while some lenders will simply reject this type of applicant altogether.
Is there an ideal credit score?
The short answer is that no, there isn’t an ‘ideal’ score that you will need to possess in order to get credit. But, it is obviously the case that the lower your credit rating is, the more difficult it will be for you to get approved for a car loan.
In actual fact, what matters most to potential lenders is the contents of your credit report, which means they will dig further than just your overall score (which varies between companies anyway).
Lenders also take into account your personal application details, such as your income, whether you are on the electoral roll, and whether you’ve taken out a loan with them previously. This means that you may be rejected by certain lenders but quickly approved by others.
Improving your credit rating before taking out a car loan
If your credit score isn’t good at the moment and your need for car finance is not urgent, it is wise to wait until you have steadily improved your score before making an application. Unfortunately, there really is no quick-fix method to improving your score – it simply doesn’t happen overnight.
However, there are several ways in which you can improve your credit score:
- • Register onto the electoral roll at your current address. This can be done even if you lived in a rented, shared flat or live with your family.
- • Pay all your bills on time and in full to prove that you are reliable and can handle your finances well.
- • Build up your credit history. This is important as having no credit may mean many companies will refuse car finance. You can build your credit by opening a well-managed bank account, get a credit card and pay it off on time, taking out a phone contract and managing your household bills properly.
- • Keep your credit utilisation rate low. This is the percentage you have been using from your credit limit and normally a lower percentage is viewed in a positive light, resulting in a better credit score.
- • Avoid applying for other credit within six months of applying for car finance.
CarFinance Plus is able to offer expert advice and tips on how customers can repair or build up their credit scores in order to be accepted for car finance.
Poor credit rating? Do not fear!
Spending time building up your credit rating is a slow process and could take many months (and in some cases, even years), which isn’t always practical, particularly for people who need to get behind the wheel as soon as possible. Thankfully, there are now many finance lenders which are open to offering loans to people with poor credit scores.
CarFinance Plus works with many of the UK’s top lenders and specialises in helping people with poor or no credit get the right car loan deal for their income and budget. We are even able to offer some 0% car finance deals so that borrowers do not need to pay an initial deposit to get behind the wheel.
Managing your car finance
Once you’ve been approved for car finance, it’s important that you are able to manage your repayments in a responsible manner in order to protect your overall credit score. As such, there are several top tips you should abide by:
- • Always make your monthly repayments fully and on time in order to keep your credit rating high and avoid negative marks on your report. This is why it is important that you only enter into an agreement which you know you are able to meet.
- • Create a monthly budget (and stick to it!) so that you know you will have the finances to cover your car finance repayment.
- • Set up a monthly direct debit, which ensures you won’t miss your car finance payment.
- • Avoid taking out any other loans while paying off your car finance