Online Auto Loans for Good, Fair, and Poor Credit
For most of us, buying a new car means taking out a new car loan. If you can’t pay for a car with the cash you have in your bank account (or if you want to save up that money for something else), an auto loan is usually your best bet to be able to afford new wheels. If you need a car loan, though, you need to start by understanding your credit. Credit is one of the most important factors that lenders use to determine how much you’ll have to pay in interest on your loan -- and whether they’re willing to give you a loan in the first place. We’ll walk you through everything you need to know about credit and car loans, no matter where your score falls on the credit spectrum.
How Does My Credit Score Affect My Car Loan?
When lenders decide whether to lend you money (and if so, how much and at what rate) they look at the “three Cs”:
Credit
Collateral: for a car loan, that’s your car -- it “secures” your loan because if you don't repay the loan, the lender can repossess it to make back the money it lent to you
Capacity: that is, whether you can afford to repay the loan based on your income and existing debts
Why is your credit history so important? Because it gives lenders a way to predict whether you’ll pay back their money as promised. If you’ve paid your bills on time in the past, lenders assume that you’ll probably keep doing so. But if you’ve had some problems with previous bills, lenders worry that you might be more likely to stumble in the future too.
That’s why it’s a good idea to start monitoring your credit before you’re in the market for a new car loan. Many credit cards and banks now allow you to see your score for free. You can also use Credit Karma or similar sites to track your credit. Just keep in mind that the scores they show you are not exactly the same ones that a prospective auto lender will use to judge your application. There are slight variations among the models used by the three main credit bureaus (Equifax, Experian, and TransUnion). Different lenders also use different models from each of those bureaus. For example, auto lenders typically put more weight on your history with car loans. So even if you have excellent overall credit, your auto-specific credit score may be lower if you’ve never taken out an auto loan. It’s still helpful to know your credit score so you can get a rough idea of what you need to improve to better your chances of getting a good loan. You should also take a look at your credit report to make sure everything is accurate and up-to-date. You’re allowed by law to access each of your credit reports for free once a year at annualcreditreport.com.
Your credit doesn’t necessarily have anything to do with how much money you make or how much you have saved up. You can have a high income and a low credit score because you borrowed more than you could afford to repay, or a low income and a high credit score because you’ve responsibly paid off all your debts on time. If you’re not sure where to begin with credit, check out these tips from the Consumer Financial Protection Bureau on how to improve your score.
What Are My Loan Options If I Have Good Credit?
The better credit score you have, the better chance you have of being approved for a loan, and of getting a lower rate. At Outside Financial, we think your best bet is to compare your options before you go to the dealership. That’s the only way to avoid dealership markups, time in the back office, and a lot of hassle. If you’re not already a member of a credit union, look for ones near you that offer auto loans. Some credit unions also offer loans nationally, including PenFed and DCU. Or if you like your existing bank, see if they offer discounts for having multiple accounts. Not all financial institutions are the same, and you might get offers that range from 5% to 15%, or get approved by some and denied by others. Ideally, if you can apply to 4-5 banks and credit unions, you’ll be able to find the one that works best for you.
Should I Worry About Multiple Hard Hits on My Credit?
In order to make an underwriting decision (that is, to decide how much and whether to lend money to you), lenders usually need to run a hard inquiry on your credit. That hard inquiry (or “hard pull”) can reduce your credit score by a few points. (By contrast, a soft pull doesn’t lower your credit score, but it also may not give enough information to the lender to make a final decision).
Too many hard inquiries could indicate to lenders that you’re shopping for too much credit, which could mean there’s a problem. BUT that logic doesn’t apply to comparison shopping for one loan. There’s no penalty for multiple hard inquiries for the same type of loan in a short period of time. FICO considers all inquiries related to auto loans within a 45-day period as a single credit inquiry; VantageScore gives you two weeks. That means if you do all your rate shopping at one time, your credit score will only go down once, even if all of the hard inquiries appear in your credit history.
What Are My Loan Options If I Have Fair Credit?
There’s no universal definition of “good” or “fair” credit, but according to Experian, a fair credit score is around 580 to 669. About 17% of people have scores that fall into that range. If you’re one of them, you might have more trouble finding the right loan, or getting a reasonable interest rate. Again, your best bet is to shop around. Some lenders, like UFCU, specialize in helping borrowers with less-than-perfect credit. Also consider carefully what kind of car you want to buy, and how much you can afford to put down. The less you have to borrow, the greater chance you have of being approved. Rates on longer-term loans (more than 60 or 72 months) are also much higher than rates for shorter-term loans, so if you can’t afford monthly payments without stretching out the loan term, consider picking a cheaper vehicle.
What Are My Loan Options If I Have Poor Credit?
About 16% of people have FICO scores below 580, so if your FICO score is less than ideal, you’re not alone. The lower your credit score, the more important it is to take the time to consider your options. For example, do you have a family member or close friend who would be willing to apply with you as a co-borrower? Lenders consider the ratio of the debts you owe to the income you make to determine how much they’re willing to lend to you. If you divide your debts by two incomes instead of one, you may be able to qualify for a better rate or with more lenders. It’s important that your co-borrower be involved in applying for the loan with you. Once you agree to the loan, your co-borrower will be equally responsible for paying it off.
Another option is to take whatever money you have for a down payment and buy a cheap used car without a loan. You can then spend time working to improve your credit so you’re in a better position to take out a car loan for your next purchase. Just make sure whatever you buy won’t need to spend more time in the shop than getting you to work; having the car inspected by an independent mechanic before you make an offer can save you a lot of money and headaches. Buying a car from another person (rather than from a dealer) is usually the best way to find bargains because you avoid the dealer’s markup, but it does mean you have to do the legwork to find the car, meet the seller (in a public place!), and negotiate.
What Are My Loan Options I Have No Credit?
Car loans are often one of the first loans that new borrowers take out. If you’re just starting to build your credit, look for credit unions with programs directed at first-time borrowers. You can also check out Experian Boost. They can use your history of repaying your phone and utility bills as part of your credit score, which can instantly “boost” your score if you have been paying those bills on time.
For any type of credit, it can also help to partner with someone else who has established credit. According to research by the Consumer Financial Protection Bureau, nearly 25% of first-time creditors apply with a co-borrower or become an authorized user on someone else’s account. Just make sure that the co-borrower or co-signer knows that they will be responsible for paying off the loan in full if you don’t.
Go Outside
No matter what your credit score is, you deserve to understand your financing options and get the right deal for yourself. We’re here to help, so don’t hesitate to contact us for support throughout the car buying process. Good luck!