The Fifth Hope

But there is a catch in the auto manufacturer’s low rate loan promotions, and it refers to the familiar slogan, “for well-qualified buyers only.” This means that you will need to have a top notch credit score, among other favorable factors to qualify. Lenders consider applicants with lower credit scores to be riskier than those with better scores, meaning they will typically have to pay higher finance rates.

Lenders, including captive financing divisions of automakers, assess an applicant’s creditworthiness largely based on their “FICO” score, which is created and hosted by Fair Issac Corp. FICO scores range from a low of 300 to a high of 850. Specifically, most auto lenders depend on an industry specific version of the FICO Score designed to be a better predictor of a borrower’s ability to pay a loan. car loan on time. While the standards may vary from one funding source to another, the higher your FICO score, the better the chances of receiving a promotional interest rate. Making a larger down payment can also help in this regard.

According to FICO, top borrowers have a score of 720 and above, with those of 690-719 coming in second. Those with lower scores are considered “subprime” and will have to pay what could be a considerably higher interest rate. Those with the lowest credit scores may be refused a loan.

FICO scores are largely based on a person’s payment history and unpaid balances. Other considerations include length of credit history, recently opened lines of credit, and credit mix, credit cards, retail accounts, small installments, etc. In addition to the FICO score, a credit report will disclose all open and closed sources of credit, credit applications / requests made, and information on overdue debts, bankruptcies and civil lawsuits. Lenders will also look at an applicant’s annual income to assess the amount of monthly car payment he can afford.

Having late or missed payments, debt collections, bankruptcies, exceeded credit limits and / or outstanding tax liens will cause the FICO score to drop.

Promotional loan programs aside, as of this writing, FICO says those with credit scores of 720 to 850 can expect to pay a nationwide average of 4.18% interest on a car loan of $ 22,000 with a term of 48 months. If your score is between 690 and 719, you will be charged an average of 5.53%. And it only goes up from there. Those with the lowest scores of 500-589 will face sky-high 16.1% rates. (If your FICO score is lower, you will probably have a hard time getting a loan at any cost.) Running the numbers means that someone with a FICO score in the range of 500 would pay $ 6,385 more in interest. over the life of the above loan someone with excellent credit.

And on top of that, some auto insurance companies will charge higher premiums (where state regulations allow) to motorists with poor credit. Although some oppose this practice, insurance companies tend to believe that drivers with low credit scores are statistically more likely to file auto insurance claims than creditworthy motorists.

It is always a good idea to periodically check your credit score, especially if you plan to take out a loan in the near future. Federal law allows consumers to get a free report each year from each of the three major credit bureaus, Equifax, Experian, and TransUnion. Banks and credit card providers often provide free credit scores to their customers. And despite what you may believe to the contrary, checking your report regularly will not affect your credit score.

Read your reported credit history carefully, keeping an eye out for any inaccuracies or errors. A study by the Federal Trade Commission found that 28% of participants found at least one material error in their credit reports. If you find one or more, be sure to contact both the lender and the appraisal agency to have it corrected.

If your credit score is low, you will want to work on improving it. Experts advise that you regularly pay off your existing debt, especially high-interest credit cards, and make all payments on time. Pay off or keep your balances minimal. But FICO recommends that you do not apply for additional credit cards or close unused accounts in an effort to increase your credit score. Likewise, avoid transferring debt from one source to another. Either of these tactics could backfire and lead to a lower credit score.