With the prices of electronics on the rise and the semiconductor shortage hitting the market hard, the car market was also not left unharmed. With both the prices of used cars and new cars on the rise, many citizens are looking to make use of their credit cards to get a new car. Of course, things are never simple when you want to go out and get a new auto loan. There are lots of things you must be aware of, as one wrong move can actually cost you.
More than half of the new buyers who buy a car opt for an auto loan. However, a debtor will not willingly give you money to borrow, if they are not sure whether you can repay your debts on time. That is when credit score and credit histories come into play. A new car transaction on average costs $40,000 in 2021. If you need an auto loan, how much credit score do you need? Even if you want to buy a cheap Nissan Sentra, you might still need a loan, thanks to the economic crash due to the disaster.
- What is a credit score?
A credit score is a score that is used to measure a person’s creditworthiness. It is basically a figure that will represent someone’s ability to pay their debts on time. So, if you are someone who has a good history of repaying all of your loans on time, you will have a good credit score. And if you have a habit of slacking off, you will be penalized and your credit score will be hurt.
A credit score is not measured on a singular basis. Instead, it has a lot of factors that are taken into consideration. Two scoring models are mostly used. These two models are used to determine the credit score. The FICO scoring model and the VantageScore are the two scoring models that are most commonly used. The score ranges from 300 to 850. 300 being a bad credit score and 850 being the high credit score.
- Classification of scores and their names
Deep Subprime: 300-500
Non Prime: 601 to 660
Prime: 661 to 780
Super Prime: 781 to 850
As you can guess, the lower the scores, the worse the credit score and you won’t get a chance to get better deals and low-interest rates. Higher the score, the better chances of someone getting the deal and getting lower interest rates.
- How much credit score do you need to buy a car?
In 2021, the rates of both used cars and new cars are already high. The lenders would really be looking for people who have a prime credit score or above prime. However, that doesn’t mean that people with lower credit scores will not get a loan. They can, but there are some caveats. However, if you are having a score above 661, you are sure to get a loan without much hassle
If you have a lower credit score, then you must be ready for more interest. The ones who are Non Prime will have to pay for around 7.14% interest. The ones who are deep subprime or below should look to pay for around 13.97% interest, which is quite a high rate.
The interest rate for prime borrowers was around 4.21% in 2020, and now it is around the same. So, the higher the rate, the more money you have to pay back. While it might seem tempting that even with a lower credit score, you can get one loan, but it might actually end up costing you a lot more over time.
The interest rate on average for Superprime users is around 2-3%. While they enjoy the lowest interest rates, they also have to keep up with the loans and pay all of their debts on time. In case they miss a payment, their credit scores will drop down below.
- What to do if you have a low credit score?
If you have a low credit score, you can still get a car. However, as it was previously mentioned, you would actually have to pay a lot of interest. It is best advised to make sure what you are getting yourself into, as the pressure of interests and loans can wear you down quickly. So, it is best to increase your credit score before you actually apply for a car loan, if you are not too desperate.
Alternatively, you can also visit a dealership that specializes in people with low credit scores. These dealerships actually offer people with low credit scores a chance to get an auto loan, if they are rejected elsewhere. However, they charge extremely high rates of interest; at around 21.31% for deep Subprime borrowers.
Another way to actually get a car loan is to get a co-signer. A co-signer is your family member, or a friend with great credit scores, who will basically share the burden of the loan with you. They will share the responsibility of the loan, and this will actually help you get a lower rate of interest. But the co-signer must also be aware that if the borrower is stuck and unable to make any payments on time, then he/she will also be stuck with the loan.
So, there are a few options that you can look for if you require an urgent car loan. However, you must also be ready to pay the highest interest rates and you will eventually have to dish out a lot of cash than intended.
Well, all we have to say in the conclusion is that you must first work towards improving your credit score. If you already own a car that runs, it’s best practice to work towards improving your credit score and holding off on the new purchase.
Also, if you go get an auto loan and pay all of your debts in time, then that will also help you build a credit score. It’s very easy to get caught in the scheme. You get a car with a low credit score, but you end up having to pay a lot more than intended. It is a slippery slope that is best avoided.
The ones with the high scores, however, have nothing to worry about and they can easily enjoy an auto loan with very low rates of interest. Always check your score before heading into a car dealership.