When it comes to purchasing a car, your credit score plays a crucial role in determining not just whether you’ll be approved for a loan, but also the terms and conditions of that loan. In this article, we’ll explore five ways your credit score can significantly impact your car-buying experience. Whether you’re a first-time buyer or looking to upgrade your ride, understanding these factors can help you make informed decisions and potentially save thousands of dollars.
Down Payment
Most financial advisors recommend using a down payment of around 20% when purchasing a car, this helps protect you against depreciation and keeps your monthly payments lower. A substantial down payment means you’re less likely to find yourself “upsidedown” on your loan (owing more than the car is worth) if you need to sell or trade in the vehicle in the near future.
However, some consumers prefer to keep their money in the bank, opting for a lower down payment or none at all. This approach might work if you have excellent credit, but those with lower credit scores may not have this option. Lenders often require larger down payments from borrowers with poor credit as a way to mitigate their risk.
Loan Term
Your credit score can significantly influence the loan terms available to you. Generally, having a higher credit score can give you access to longer loan terms. While a longer term can lead to paying more interest over the life of the loan, it can substantially lower your monthly payments.
For example, let’s consider a $25,000 car loan at 5% interest:
- With a 36-month term, your monthly payment would be about $749
- With a 60-month term, your monthly payment drops to about $472
- With a 72-month term, it further reduces to about $406
This flexibility can be crucial for budgeting, especially if you’re balancing other financial obligations. However, it’s important to weigh the trade-off between lower monthly payments and higher total interest paid over the life of the loan.
Access to More Vehicles
Obtaining a higher credit score, either by building credit or credit repair, doesn’t just affect your loan terms; it can also broaden your car-shopping options. With a better credit score, you’re more likely to be approved for a higher loan amount, allowing you to consider a wider range of vehicles. Having good or “prime” credit saves you money on financing allowing you to get more vehicle for a lower payment. Further, consumers with lower or “subprime” credit scores are often restricted to newer, lower-mileage vehicles (which are typically more expensive) or find yourself limited to certain makes and models that lenders consider lower risk.
Special Financing Offers
We’ve all seen those flashy dealership ads: “0% APR!” or “No payments for 6 months!” While these offers can indeed save you a substantial amount of money, there’s often more to the story than meets the eye.
What many of these ads don’t prominently disclose is that these special offers are typically reserved for borrowers with excellent credit—often those with scores in the mid-700s or higher. These promotions serve as a way to get potential buyers through the dealership doors, but in reality, only a small percentage of customers actually qualify for these deals.
However, this doesn’t mean you should ignore these offers entirely. By understanding the credit requirements for these promotions, you can set goals to improve your credit score over time. With some careful attention to your credit health, you might find yourself eligible for one of these money-saving deals in the future.
Defend Against Depreciation
On average, a car loses 10-15% of its value per year, and up to 30% per owner. Being “upside down” or “underwater” on your car loan means owing more on the loan than the car is worth. This situation can be financially stressful, especially if you need to sell the car or if it’s totaled in an accident. Moreover, if you do find yourself upside down, a good credit score gives you more options for refinancing or consolidating your debt, potentially helping you get back above water more quickly.
Your credit score is more than just a number—it’s a key that can unlock better terms, more options, and potentially significant savings when you’re in the market for a new car. By understanding how your credit score impacts these five factors, you can make more informed decisions about your car purchase and potentially set yourself up for a better financial future.
Remember, if your credit score isn’t where you’d like it to be, don’t lose hope. With consistent effort and smart financial habits, you can improve your credit score over time, setting yourself up for better car-buying experiences in the future.
