How Your Credit Affects Your Car Loan and What You Can Do About It

Written by: Christy Rakoczy

Many people finance the purchase of an automobile rather than paying cash for a car.  While there are plenty of car dealerships that offer financing to any buyer regardless of their credit, car loans can be a huge expense if you don’t get the right financing terms.  Your credit score is going to have a major impact on whether your car loan is affordable or whether the interest, fees and costs make your car a bad deal. As such, it is important to understand what your credit score is, how it affects your car loan, and what you can do about it.

How Your Credit Score Affects You Car Loan

Your credit score is a three digit score that tells lenders how credit-worthy you are. Your credit score affects every lending and borrowing transaction that you enter into- including a car loan. If you have good credit, then you should get the most favorable terms including being able to take advantage of 0-percent offers and others special introductory financing offers that car dealers are so fond of offering as incentives. If you have bad credit, on the other hand, then you may not be approved for conventional financing or for dealer financing at the big name dealers.

A history of late payments, a recent bankruptcy, carrying large amounts of debt and taking on too much debt at once can all adversely affect your credit score and, in turn, adversely affect your ability to get a car loan or to get a car loan on the best terms.  If this occurs, you may not qualify for special deals and you may be forced to accept a loan on unfavorable terms if you must get a loan to buy a car.

What to Do About A Car Loan and Bad Credit

If you have bad credit, the best thing you can do is wait to take on a car loan until you have improved your credit score.  With the passage of time, the negatives will begin to drop off of your credit record. If you either have a credit card or get one (store cards and secured cards are attainable even with poor credit), you can pay down debt and make on-time payments to improve your score. Once you get a positive payment record and your credit score has begun to go up, you can get a car loan at that point.

If you cannot wait, then you have a few options. One is to consider getting a co-signer who has good credit. If a family member or friend is willing to co-sign a loan with you, then you can typically get better financing from the lender.  Just be sure to pay on time so your co-signer isn’t on the hook for the debts that you take on.

If you cannot find a co-signer or don’t want one, then be sure to shop around carefully, read the fine print and ensure that the loan agreement you are entering into is affordable for you. Watch for fine print and be careful of dealers that seem to promise financing no matter what your credit, as the terms of the loan could be really bad for you and could end up hurting your credit even worse. Sometimes, a credit union or bank may be more willing to make you a fair deal for a car loan, depending upon just how bad your credit score is.  Whatever you do, though, don’t take on a loan just to buy a car if it is a loan that you aren’t confident you can pay for.


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