If you’re looking for a new car or truck, you’re probably excited to pick out the model, paint job, and all the accessories that come with the vehicle. However, your ability to finance the vehicle is just as important, if not more important, than all the cool details and add-ons.
Most people choose to purchase a new car or truck through financing, which is the process of paying for a vehicle with loan installments. Financially, this is a much more manageable method of vehicle ownership than paying for a vehicle in a giant lump sum of several thousand dollars.
You can get a car or truck loan directly through the dealer of your choice; through a bank, or through an individual. Each payment method comes with inherent risks and rewards (for example, loan rates through banks may be higher, but you may not have legal recourse, should there be a problem with a private loan or family). Before deciding on a type of loan, these risks and rewards must be carefully weighed.
However, for many Americans, the biggest risk factor when buying a new vehicle is whether or not they will actually be eligible for the loan. A person’s credit score determines their creditworthiness; this number will tell the lender whether or not that person will reliably make payments on a car or truck. The lower your credit score, the lower your chances of getting a loan at an affordable rate. In fact, some people with especially bad credit scores may find that they’re having trouble getting a loan in the first place.
What is a credit score and how does it affect your ability to get a new car or truck loan?
Kenneth Elliot wrote in the March 21, 2008 issue of the American Chronicle, “…[T]The FICO score remains a primary tool for lenders. It may not determine the final decision, but it definitely influences the ‘first cut’ when a stack of requests to approve or disapprove is presented.”
FICO is an acronym for the name of the consulting firm that developed standards for calculating credit scores, the Fair Isaac Corporation. The FICO scoring rubric is the most commonly used method of determining a person’s creditworthiness. In the United States, credit bureaus or credit reporters look at an individual’s financial past (debts, loans, utility bill payments, previous car loans or mortgages, and more) to determine if he or she is a good credit risk. A FICO score ranges from 300 to 850. 850 is the highest possible credit score; people with high scores have little or no problem getting loans. Conversely, credit scores near the lower end of the FICO score range indicate people who are subprime borrowers; These people often have extreme difficulty managing their debts.
CNN Money reports that the average American has more than $9,000 in credit card debt. Late or missed credit card payments are one of the biggest factors that lower individual credit scores. Many people spend more money than they actually earn and are drawn to the lure of credit-based purchases, which at first seem like easy money. Those with a high debt-to-income ratio may not be able to afford monthly credit card payments. After a few months of missed or late payments, a person may find that their credit score is shockingly low.
The FICO credit score is determined by a sum of factors. Each factor in a person’s credit history is assigned a different weight in the final evaluation of their financial situation. In determining a credit score, the greatest weight is given to the individual’s debt and bill payment history (Is he or she on time or perpetually late?) and the total amount of debt they owe. Less important, but still contributing to the final credit score, are the length of a person’s credit history; the types of debts he has and how often he has applied for new credit. People who make bill payments on time, have established a long credit history, and have demonstrated convincing debt management skills often have the best credit ratings.
Before you are eligible for a car or truck loan, you will be required to provide the lender of your choice, whether it is the car dealer, the bank or an individual, with certain information about yourself. Information required may include full contact information; a social security number; details about your mortgage or apartment lease and employment records. The lender will give your information to one of three credit reporting agencies: Equifax, Experian, or TransUnion. The credit reporting agency uses the FICO algorithm to determine your credit score.
If your credit score is less than stellar, don’t despair. You may still be able to finance a new vehicle. Remember: You always have two options when it comes to comparing a bad credit score to strict car or truck loan terms. You can work to improve that score, or you can find lenders who are willing to work with you. However, if your credit score is good, then you are a preferred borrower and will probably be able to get loans with attractive (ie low) interest rates. Get out there and get that new car or truck loan!