Few purchases are as significant or exciting as that of a new car. Of course, most people must take out a loan to afford this investment, and your credit score plays a major role in what terms you can receive.
Scores That Qualify You for a New Car Loan
If you’ve got your eye on picking up a reliable automobile, such as a new Toyota for sale, the dealer will consider your credit score before offering you specific loan terms. Each lender has different standards for what it considers a minimum credit score for new car loans. Financial institutions prefer low-risk borrowers and offer their best rates to individuals with good to excellent credit ratings.
Lenders usually view a good credit score as ranging from 670 to 720. These scores can secure a lower interest rate for a longer loan life and a lower down payment. However, you could still qualify for a loan with scores as low as 500, depending on the rest of your financial profile.
Bear in mind that advertisements for vehicles will typically show you the likely payment and annual percentage rate for borrowers with good or excellent credit. As such, these ads are not a promise of a specific rate from the dealer but are the terms that approved buyers will receive.
Other Factors That Affect Loan Terms
The lender won’t just consider your credit score when approving you for a loan. Other signs of financial stability can give them enough reason to approve you.
For example, if you have a steady job, a lender might be more apt to approve a loan. Prepare to bring at least the previous two pay stubs if you’re an employee. You’ll need to show your W-2s from the previous two years for proof of income if you’re self-employed.
Your residence can also indicate that you’re a low credit risk. Mortgage statements or utility bills will prove that you have a steady living situation and how long you’ve been at your current address.
Finally, a larger down payment can compensate for a low credit score and help you get a lower monthly payment. Putting more money down could even lower your interest rate.
How To Improve Your Credit Score
You can take steps to keep your credit score high by consistently demonstrating financial responsibility. Do the following things before applying for a car loan:
- Decrease your credit utilization by keeping your credit card balances low.
- Leave credit card accounts open, giving you more available credit and low utilization.
- Pay your bills on time to avoid negative reports against your credit profile.
- Don’t apply for other forms of credit in the six months before applying for a car loan.
Reliable transportation is a necessity, so prioritize putting your credit in good shape before car shopping to secure reasonable terms on a trustworthy new vehicle.
Good Preparation Before Buying a New Car
A strong credit score helps you qualify for the vehicle you want at better terms, so you should always work at keeping good credit for the inevitable moment when you’ll need or desire a new car. Even so, lenders can find ways to help you qualify with a less-than-stellar rating, so don’t hesitate to sit with a loan officer to discover what options are open to you.