You may have already heard that credit score can seriously affect your ability to get a car on finance. A credit check is a tool used by lenders to see how you’ve handled your credit in the past and the likelihood of you paying your car loan back on time, based on your previous borrowing history. Car finance is a great way to spread the cost of getting a car and it means you can choose to pay over a term that suits you. But how do credit score affect your car finance approval rate? The guide below looks at the effect credit can have on your car loan and how to increase your chances of getting approved.
What is a credit check?
A credit check is when a lender asks to take a look at your credit history. Your credit score is calculated by factors like your payment history, the amount of credit you have and how much of your available credit you’re using. A low credit score usually indicates that you’ve missed payments in the past, have never borrowed before or have high level of existing debt. A credit check is used to assess the level of risk when you borrow money. A lender gets access to your credit report and can see the information it holds.
Do you need a credit check for car finance?
Most lenders do require you to undergo a credit check when you apply, for finance to check your eligibility. You will need to meet the lenders criteria before you can get a car finance approval and many lenders had a minimum credit band that needs to be met before they would offer finance. There can be lenders who don’t require a credit check to be performed but they usually set higher interest rates to secure the deal so you should be wary of these guaranteed car finance companies.
Does car finance affect your credit score?
Initially, your credit could be affected when you make applications for finance. Multiple hard search applications with different lenders in a short space of time can have a negative impact on your credit score. Instead, by using soft credit check car finance applications, you can help to protect your credit score and these checks won’t be recorded on your credit file either.
The affect car finance has on your credit score depends on how you handle your credit agreements. By meeting all of your payment deadlines on time and in full and also keeping on top of your other financial commitments, you can actually use your agreement to improve your credit score. Missed or late repayments can have a detrimental effect on your score and can affect your ability to get a car in the future.
How does your credit score affect car loans?
1. Approval rates
Before you can get a car on finance, you will need to have a valid approval in place. An approval is when lenders decide to give you finance. They could reject your car finance application on the basis of a low credit score. Due to your previous behaviour, lenders may be worried that you are more likely to default on their finance too and can influence their decision.
2. Monthly payments
Your credit score could affect your monthly payments as it can affect how much you could borrow and your interest rate. All costs and fees are factored into your monthly payments which can drive the price up and make it less affordable for many drivers. Choosing a longer loan term can help to lower your monthly payments but it also means that you are taking longer to pay the loan off and increases how much interest you pay.
3. Interest rate
There are car finance deals that come with 0 interest to pay but these rates are usually reserved for those with good or excellent scores. A lower credit score can mean you face higher interest rates to help secure the deal and decrease the risk to the lender. Higher interest rates make the cost of borrowing more expensive and means you end up paying more for your finance deal.