Whenever you are looking to make a large purchase, backed by a sizable loan, you are likely to hear comments about your credit score. However, beyond that acknowledgement, the conversation often stops abruptly there.
Loans and credit scores have a unique relationship – a reciprocal bond you should understand before signing any car contract.
Specifically, looking at auto loans, your credit score is among one of the most important numbers you should know when weighing options. Sure, the vehicle’s price, monthly payments and mileage are all probably on your radar as well, but don’t underestimate your credit score when factoring in how much car you can afford. Likewise, remember that with proper handling, paying off a sizable loan can in turn affect your credit score.
Before The Purchase
When you are comparing loan options, your credit score is a huge determining factor for what your interest rates will be. Based on your credit, potential lenders see a snapshot of how you handle loans, your payment tendencies and the likelihood of responsible repayment going forward. Based on your past actions, lenders make a wager on how you will act in the future – and place a number on that to counterbalance the risks they are taking by lending you money.
The Empowered Dollar creator and financial guru Stephanie Halligan commented, “Since your credit score is such an important piece of the overall cost of your car, it is good to know what kind of number you’re dealing with before you head out to buy a car. Before you start to shopping around [sic] for the car of your dreams or start the process of negotiating rates on an auto loan, check your credit score and your credit history. You’ll have a much better sense of the types of interest rates you’ll qualify for and a better estimate of the overall cost of the car.”
Not sure where to start? Quizzle can help you apply for an auto loan.
While interest rates are not solely determined by your credit (there are other factors at play, such as how the broader market is performing and how the car market specifically is fairing), it can mean the difference between a great interest rate on a loan, a higher rate or even no approval at all. This can equate to additional thousands of dollars over the lifetime of your loan.
Simply speaking, the better your credit looks to lenders, the less inflated your total amount payable will be. The more worrisome or thin your credit looks, the more likely a lender is to treat your application warily.
As Payments Are Made
Another piece of the puzzle to consider when looking at auto loan options is how the loan will affect your credit history.
Opening an additional line of credit (which is what you are doing when you take out a car loan) has two major effects regarding your credit.
- You will have a new hard inquiry on your credit which can cause a small decrease to your credit score for a short time.
- Your credit score will reflect how you handle the loan by moving up or down based on your actions.
Unsure of your credit score? Get your free VantageScore through Quizzle, here.
NerdWallet’s Clair Tsosie reminded, “If you’re always on time with your car payments, your credit report will show that your car loan is ‘current’ or ‘paid as agreed.’ Because payment history also accounts for 35% of your FICO score [and a sizable chunk of VantageScore numbers as well], staying current on your payments could also increase your credit score significantly. By falling behind, you may risk having your car repossessed by your lender and ruining your good credit.”
Opening a line of credit can help bolster your credit report, but be aware that just having the additional line is not enough. Your credit report is only helped by multiple lines if they are handled responsibly. Acknowledge your financial tendencies and take responsibility for your financial portrait. It is up to you to represent yourself favorably. Pay on time, every time, and let your credit speak highly of you.
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