Back in the day, people used to ride a horse and carriage to get around. Luckily, we live in a day and age where we can use cars to get to where we need to go. However, even though cars are much more convenient, we have to deal with things like gas prices, car insurance premiums, car loans, etc.
Sadly, some of these factors can impact your credit score. Your credit score is an important part of life. That means that when dealing with your car expenses, you don’t want to accidentally ruin your credit score in the process.
Do You Have a Car Loan?
There are a variety of car expenses that people need to deal with. Not everyone has the same expenses! That’s because sometimes people need to finance their car with the help of a lender. When people have to finance their car, they have to deal with a monthly car payment. However, getting a car loan is a process and can impact your credit score more than you may realize.
Understanding Auto Loans
Cars can be expensive, regardless of whether or not it is a used car or a new car. The average cost of buying a used car was $30,620 back in December 2021. That’s a lot but still less than the average price of a new car which was roughly $47,077 back in December 2021. Most people can’t handle these costs up front. That is where auto loans come in.
When you need financing assistance, you can get an auto loan from a lender. This is when you borrow money (that you need to repay) from the lender in order to purchase the car. Since these are funds that you need to repay, you will need to enter an agreement with the lender and the seller to go over the terms of the purchase.
How to Get an Auto Loan?
If you want to get a car loan it may be a more in-depth process than you realize. First of all, you will want to find the right lender. You can get financing support through:
- Financial Institutions
- Car Dealers
- Online Lenders
However, oftentimes people will go to the car dealership and see if they can finance through the dealer or a local financial institution that the dealership works with. Regardless, you have options to choose from. Each lender will have their own customer benefits, criteria, etc. One factor that they look at is your credit score.
Make Sure You Understand Your Credit Score
Your credit score is a number that’s generally between 300 and 850. This number is what lenders use to calculate your credit worthiness. Your creditworthiness is the measurement of how you handle the credit you borrow. This score is calculated by credit bureaus that use information found on your credit report. Your credit report contains information about your credit file like credit accounts, on time payments, credit history, etc.
There are three major credit bureaus which are Experian. Equifax, and Transunion. When credit bureaus calculate your credit score, they use a scoring model. There are two main types of scoring models which are either the VantageScore model or the FICO scoring model. While both are used, the FICO model is much more popular!
What Factors Impact Your Credit Score?
There are a variety of factors that impact your credit score. Since the FICO scoring model is more common amongst lenders, that is the model we will be using as reference for how each factor can affect your score. The 5 factors are:
- Payment History
- Credit Utilization
- Length of Credit History
- Hard Inquiries
- Credit Mix
Since your credit score is a number that lenders use as a way to understand how you handle the credit you borrow, it should come as no surprise that this is the biggest factor on this list. Your payment history includes information like on time payments, late payments, and more. This factor accounts for 35% of your credit score.
Many people aren’t familiar with what credit utilization is but it’s an easier concept than you may think! Credit utilization refers to the ratio that looks at your overall credit limit compared to your current credit usage. For example, if you have a total credit limit between 2 credit cards that totals $2,400 but are using $1,848 then your credit utilization ratio would be 77%. This factor impacts 30% of your score.
Length of Credit History
The third factor on this list is your length of credit history. This factor accounts for 15% of your credit score. It includes information like the age of your accounts. This means it doesn’t matter whether it be the newest, oldest, average age of your credit accounts, etc.
People may not know that there are two types of inquiries that are important when it comes down to dealing with their credit score. There are soft inquiries and hard inquiries. Soft inquiries do not have any impact on your credit score (whether good or bad). However, hard inquiries are a different story. Hard inquiries (also known as hard pulls) allow lenders to get an in-depth look at your credit file. In order to get access to your credit file, you would need to provide written authorization. Hard inquiries can impact your credit by 10% (or up to 5 points).
At the end of this list is your credit mix. Just like hard inquiries, your credit mix accounts for 10% of your credit score. There are two main types of credit:
- Installment Loans
- Revolving Credit
Installment loans are loans that individuals repay like a new car loan, a mortgage, etc. On the other hand, an example of revolving credit would be a credit card or line of credit. The types of credit accounts you have on your credit report can impact your credit score!
How Much Does a Car Loan Affect Your Credit Score?
There are many ways that an auto loan can impact your score. If you need to get financing done, lenders will need to submit a hard inquiry in order to determine your eligibility. However, like we said earlier, hard inquiries can reduce your score. Car loans affect your credit in other ways as well. For example, if you don’t properly handle your monthly payments then you could see a decrease in your score.
When you finance your vehicle with an auto loan, you will need to make payments every month to the lender. The amount these monthly payments will be varies by person but is usually based on factors like:
- Overall Loan Amount
- Annual Percentage Rate (APR)
- Length of Loan Term
However, if someone has auto loan payments that are too expensive to deal with, they may not be able to keep up with their due dates. This can lead to people falling behind on their payments which results in late payments. Late payments can impact your score since they are a part of the biggest factor that can affect your score!
Commonly Asked Questions
Managing your car loan while handling your credit can be confusing. Luckily, it doesn’t have to be. People have had questions when dealing with their car loans and credit that you may have to. Hopefully we can provide some useful information!
What’s the Minimum Credit Score Needed for a Car Loan?
The answer varies based on the lender. Not every lender will have the same eligibility guidelines. You may be able to get a pre-approval which involves a soft inquiry. This can give lenders a ballpark guess on whether or not you would qualify.
Is There a Way to Get a Car Without an Auto Loan?
The only way that you would be able to buy a car without an auto loan is by using other means of payment like cash or a credit card. However, these options are typically hard to achieve. Most people don’t have the cash they need upfront or the available credit to put the car purchase on their credit card.
Will Your Auto Loan Show Up on Your Credit Report?
Yes! Since an auto loan is a type of installment loan, you can expect this item on your credit report. That is why it is especially important to properly manage this type of account. Late payments will end up on your credit report and can stay there for up to 7 years!
How Many Credit Scores Do You Have?
Many people think that they only have one score but that’s actually not the case! Instead, people have multiple different credit scores. That’s because lenders may not report to all three of the major credit bureaus. That means they will have different information which will lead to each of them having different versions of your credit scores.
People can look up their credit scores by checking with their card issuers or by using third party apps. Regardless of how you check it, you can typically see all the different versions of your credit scores in one place. This can help you understand how credit scores change depending on the credit bureau! The best part? Typically you can check your credit scores for free.
What Kind of Car Payments Can You Get with a Good Credit Score?
While having a good credit score can help you get better car payments, that isn’t the only factor that matters. That is why it is important to keep in mind that it depends on your current financial situation. An article online can’t tell you what your car payments would be (at least, this one can’t).
Your car loan can affect your credit score in more ways than you realize. That is why it is important to have a clear understanding of what your score is, and what auto loans are. Your score is a number that’s generally between 300 and 850. This number is what lenders use to calculate your credit worthiness. Your creditworthiness is the measurement of how you handle the credit you borrow. This score is calculated by credit bureaus that use information found on your credit report. Your credit report contains information about your credit file like credit accounts, late payments, and more.
On the other hand, when you need financing assistance, you can get an auto loan from a lender. This is when you borrow money (that you need to repay) from the lender in order to purchase the car. Since these are funds that you need to repay, you will need to enter an agreement with the lender and the seller to go over the terms of the purchase.
This knowledge can help you deal with both of them at the same time! If you have any questions about handling your credit when it comes to financing your auto loan you can get in touch with a professional like a credit counselor.