Buying a new car or truck is a major purchase. Unless you are in a position to pay cash upfront to the dealer, you will have to consider financing options. The terms and conditions associated with your loan will determine just how much you pay for your car. Just like other forms of credit, the interest rate for a car loan is calculated using your credit score. Buyers with higher credit scores will see more favorable terms than those who have less than perfect credit. Before shopping for your next vehicle, take a few minutes to learn more about car financing and the impact of your credit score on it. Learn what a good credit score is.
Who Finances Your Car Loan?
Many buyers are under the false impression that the car dealership is the actual lender. Car dealerships sell cars, but they do not provide financing to purchasers. The car dealer is the middle man between the buyer and the financing company. Even though your car dealer is not providing the financing, they can help get the ball rolling. For example, your dealer may help you fill out a loan application and run a credit check to get an idea of the type of terms for which you qualify. The final approval, however, must come from the bank or financing company who will perform a more detailed credit check before making their final determination.
Loan Terms Based On Credit Score
Lenders review an applicant’s credit history to determine risk. Your credit score will determine which of three categories in which you fall. Prime customers are those with a credit score of 700, or higher, near-prime customers have a credit score in the range of 620-680 and sub-prime customers have a score below 620. A credit score of 700 or greater will get you the best interest rates with those in the sub-prime category paying up to 5% more in interest. If your score is below 620 you may have difficulty qualifying for a loan; those who do will pay much higher interest rates. The credit score categories used by your lender may differ slightly from that listed here, but most will be very close. The same goes for interest rates which are determined by the individual lender.
Before shopping for a new car or truck, consumers should review their credit report and credit score. Looking at the same information as a lender will give customers an idea of what to expect regarding financing. Buyers with good credit are better able to negotiate low-interest rates while buyers with bad credit may decide to postpone plans to purchase a car until their credit is better. When it comes to credit scores and financing, a few points in either can cost or save you thousands of dollars in interest over the life of the loan. Any effort to save money or improve financing terms will pay off in the long run and ensure your purchase is one that you can afford.
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