The average cost of a new vehicle in Canada is now over $50,000.
If you’re thinking of getting a used car instead, the used car market has seen an increase of around 35% over the last few years as well. These increases have made buying a car more expensive than ever before.
With prices soaring to new heights, more people are relying on car finance solutions to help them buy a car. While this helps make a car easier to buy, it’s heavily dependent on your auto loan credit score. These credit scores dictate how much you can spend and ultimately guide you toward the right car for you and your budget.
Looking for more information about auto loans? You’ve found the right blog. Here’s everything you need to know about credit scores and how they affect your auto loan.
Credit Scores and How They Affect Your Auto Loan
What Are Credit Scores?
A credit score is a general metric that lets lenders and banks know about your personal creditworthiness. This basically indicates how well you manage your money and how much credit you can comfortably and reliably qualify for.
While credit scores work on slightly different scales in different countries, they are generally based on a numerical scale between 300 and 900. The actual scale can be different depending on the credit rating agency or company that is responsible for creating it.
What Is a Credit Rating Company?
Credit rating companies are dedicated financial and data companies that are responsible for generating and updating credit scores. These companies work primarily in the financial industry but generally work with large sets of data to come up with these numbers.
These companies receive information and data about you and your personal financial history in order to accurately assess your personal affordability. For example, a credit rating company will gather information from your bank, employer, and other companies that you interact with to create a profile of you. They will then use this profile to determine what your credit score is.
What Do Credit Rating Companies Base Credit Scores On?
Credit rating companies collect all kinds of data about you and your financial behavior. The first place they start is with your bank and any credit that you may have received in the past. This includes credit cards, overdraft facilities, and any short-term loans. Once they have all of your accounts listed, they look through your transaction history to see if you kept up to date with payments and how much credit you used.
Some credit companies go so far as to look through each transaction to see how you spend your money. Reckless spenders that end up with little to no money at the end of the month won’t get as high of a credit score as those who pay their bills on time and always manage to save some money at the end of the month.
Credit companies also see how long you’ve had accounts open, and how much money comes into your bank account every month. They can even verify your employment by contacting your place of work to get more accurate information. However, lenders tend to do this more than credit rating companies as the rating companies try to work with data that already exists.
How to Check Your Credit Score
If you want to check your credit score, there are a few ways to go about doing that online. While you can pay for a full credit report from your bank, there are a few big credit rating companies that offer this service directly to companies.
These credit rating companies offer a full credit report. This report shows you your credit score but also breaks down how the agency came to that score. They will show you all your open accounts, your outstanding debt, and even list every missed payment you’ve had in your life.
Credit reports are incredibly accurate, but you can dispute them if you can prove that the information the credit rating company is using is not correct. Most credit rating companies are open to correction and have dedicated pathways for customers to ask for revisions.
How To Build a Credit History
As mentioned earlier, a credit score is based heavily on your credit history. The best way to build a positive credit history is to improve your financial health and build better financial habits. This means paying off your debt, never missing a payment, and living within your means.
While a good credit history is important, your affordability is just as important. Your affordability refers to how much income you receive every month and how much you have left after all your expenses. This is the single most important figure lenders work with to determine how much credit you can qualify for.
If you’re applying for a car loan, lenders know that you should never spend more than a third of your gross income on your car. This means that they won’t offer you credit that would require a monthly premium of more than a third of your salary.
How Does Auto Loan Financing Work?
Unlike a personal loan, auto loan financing is based on the car that you want to buy. This means that once you find the car that you want to buy, you can apply for financing to help you buy that specific car. The bank or lender will help you with the funds and even help with the paperwork and registration.
How Important Is the Interest Rate?
The interest rate that you get with your loan is the most influential factor to consider. This rate can completely change the amount you pay every month. A great way to determine whether you have a good or bad interest rate is to see how it relates to the prime rate.
The prime interest rate is the rate at which the banks and lenders can borrow money from the reserve bank of that country. Every country has a different prime rate, with Canada’s rate being 4.7% right now. Due to the fact that every country’s rate is different, the interest rate as a relation to prime is used.
This is noted by saying that the interest rate is either prime + % for a higher interest rate, or prime – % for a lower interest rate.
What Is a Good Interest Rate for an Auto Loan?
The interest rate that you get is incredibly important and has a massive impact on what your monthly premium will look like. If you’re thinking to buy your car over six years, an interest rate of around 4% is ideal. If you have a bad credit score, you can expect an interest rate of around 6% to 8% for the same amount of credit.
What Is a Bad Credit Car Loan?
A bad credit car loan is a loan designed for people with a less-than-ideal credit score. A good credit score is difficult to obtain and can take a long time to turn around. This is why some lenders opt to do their own research and approve candidates that they believe to be worthy of the credit.
These loans make financing more accessible but generally come with a higher interest rate. While good credit scores may get the prime rate or lower, bad credit loans can be prime + 2% or more.
How to Improve Your Auto Loan Credit Score
As mentioned above, your credit score is based on several factors relating to your financial history. This data is used to determine how much credit you can comfortably afford to spend on a car. If you’re looking for ways to improve your credit score, here are a few essential tips.
1. Get a Credit Card
While many may advise not to get a credit card, it’s actually one of the best ways to build a healthy credit score. Credit cards are the easiest form of credit to get as you can even get one without any credit history. Some banks offer secured credit cards, meaning that you’ll need to put down a cash deposit in order to get the credit card.
Managing and handling a credit card well can make your credit score skyrocket. This is because a credit card takes discipline to manage properly and collects data about your financial behavior directly from you. This way, banks and lenders know exactly how you handle your money and how much you can actually afford every month.
2. Never Miss a Payment
Whether you have a credit card or short-term loan, make sure you pay your bills on time. Missing payments is one of the biggest reasons for people having bad credit scores as it reflects negatively on your affordability. Even the smallest of missed bills can look bad to banks and lenders.
The easiest way to never miss a payment is to set up an automatic payment so that the money comes out from your bank account automatically. If you can’t set debit orders, the next best thing is to set a reminder every month on your phone. This is a great way to keep you up to date with all payments so that you can start building a good track record for yourself.
3. Settle Past Accounts
Bills can quickly pile up and can end up being incredibly difficult to pay off. If you’re looking to give your credit history a makeover, you need to start with settling your outstanding bills and debt. While keeping track of hundreds of small bills can be difficult, you can consolidate it all into one manageable payment every month.
These loans are known as consolidation loans and work by giving you the finances you need to settle all the smaller bills. This effectively transfers the debt from all the smaller lenders to one lender that can organize a payment play specifically for you. This will also remove all the smaller debt amounts from your credit record, improving your score a bit in the process.
4. Don’t Make Too Many Applications
Every time you apply for credit, it’s recorded. Banks and lenders keep track of how many applications you make to see how often you require credit. If you’re someone who constantly applies and gets rejected for loans, it can reflect badly on your credit record.
While applications can look bad, they don’t stay on your credit record forever. This means you can improve your credit score by applying for credit only when you really need it, and when you also know that you’ll get approved.
5. Control How Much Credit You Use
Lastly, show lenders that you know how to manage available credit by using it sparingly. While banks and lenders want you to use as much as possible, you can actually improve your credit score by using a smaller percentage of your available credit.
This means that if you qualify for $2,000 on a credit card but only use $150 every month, the bank knows that you can be trusted with more because you don’t abuse the available funds. This shows good financial management skills and general affordability.
Secure an Auto Loan Today
Credit scores are incredibly important metrics that let lenders know about your financial history. Your auto loan credit score is especially important when trying to secure financing for your car and dictate how much you can actually qualify for. The better your score, the more credit you can qualify for and the more you can spend on your new car.
Have any questions or want to learn more about auto loan credit scores? Feel free to contact us. If you’re ready to get started, visit our website to apply online today!