If you’re in the market for a new car or truck, you are probably excited to choose the model, the paint job, and all of the accessories that come with the vehicle. However, your ability to finance the vehicle is just as important – if not more important – than all of the cool details and add-ons.
Most people opt 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 one giant, multi-thousand dollar lump sum.
You can obtain a car or truck loan directly through your dealership of choice; through a bank, or through a private individual. Each method of payment comes with inherent risks and rewards (for example, loan rates through banks can be higher – but you might not have legal recourse, should there be an issue with a private or family loan). Before deciding upon a loan type, these risks and rewards should be weighed carefully.
For many Americans, though, the biggest risk factor when purchasing a new vehicle is whether or not they will actually be eligible for the loan in the first place. An individual’s credit score determines his or her credit-worthiness – this number will tell the lending institution whether or not that person will reliably make car or truck payments. The lower your credit score, the lower your chances are of securing a loan at an affordable rate. In fact, some people with especially bad credit scores might find that they are having trouble securing a loan in the first place.
What is a credit score, and how does it affect your ability to secure a new car or truck loan?
Kenneth Elliot wrote in the Mar. 21, 2008 edition of the American Chronicle, “…[T]he FICO score remains a primary tool for lenders. It may not determine the final decision, but it definitely influences the ‘first cut’ when presented with a stack of applications to approve or disapprove.”
FICO stands for the name of the consulting firm that developed standards for credit score calculation, the Fair Isaac Corporation. The FICO scoring rubric is the method most commonly used to determine an individual’s credit-worthiness. In the United States, credit bureaus or credit reporters analyze an individual’s financial past – debts, loans, utility bill payments, previous car loans or mortgages, and more – to determine whether he or she is a good lending risk. A FICO score ranges from 300 to 850. 850 is the highest credit score possible; individuals with high scores have little or no trouble securing loans. Conversely, credit scores near the lowest end of the FICO score range indicate individuals who are high-risk borrowers; these people usually have extreme difficulty managing their debts.
CNN Money reports that the average American carries over 9 thousand dollars 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 make, and become attracted to the allure of credit-based purchases — which seem like easy money at first. Those individuals with high debt-to-income ratios might not be able to afford monthly credit card payments. After a few months of missed or late payments, an individual might find that his or her credit score is surprisingly low.
The FICO credit score is determined by a sum of factors. Each factor of a person’s credit history is given a different weight in the final evaluation of his or her financial situation. When determining a credit score, the greatest weight is given to the individual’s debt and bill payment histories (Is he or she timely or perpetually late?) and the total amount of debt he or she carries. Less important – but still contributing to the final credit score – are an individual’s credit history length; the types of debts he or she carries, and how often he or she has applied for new credit. Individuals who make timely bill payments, who have established long credit histories, and who have demonstrated convincing abilities to manage debt often have the best credit scores.
Before you are eligible for a car or truck loan, you will be asked to supply your lending institution of choice – be it the car dealership, the bank, or a private individual – with some information about yourself. Information required might include complete contact information; a social security number; details about your mortgage or apartment lease, and employment records. The lending institution will turn your information over 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 might still be able to finance a new vehicle. Remember: You always have two options when it comes to pitting a bad credit score against stringent car or truck loan terms. You can work to improve that score, or you can shop around for lenders who are willing to work with you. However, if your credit score is good, then you are a preferred borrower, and you will probably be able to get loans with attractive (meaning low) interest rates. Go out there and get that new car or truck loan!