It’s no secret your credit score is important. But many are surprised how great a role it can play in the overall cost of your loan. When financing a vehicle, your credit score matters in terms of:
- Getting approval for a car loan
- The amount you need for a down payment
- The total interest you’ll pay over the life of your loan
Of course, the higher your credit score, the more favorable results you’ll realize when purchasing your car in a non-cash transaction.
Getting Approval for an Auto Loan
Having a good credit score makes it possible for you to get approval for an auto loan you may need on a vehicle purchase. However, while most people are able to finance a new vehicle even with a lower credit score, what they pay can vary tremendously.
Amount of Down Payment Needed
Your credit score may also play a role in your down payment. If you have a low credit score, you might be required to put a larger down payment on the vehicle. This helps establish some equity in the car and lowers the risk level for the lender.
Amount You Pay in Interest
Ultimately, your credit score is one of the primary contributing factors determining how much interest you’ll pay on your auto loan. If your score is less than perfect, you'll find yourself paying a higher interest rate for your new car.
A good credit score can get you more favorable terms when you take out your auto loan. This is because the higher your credit score, the lower the risk lenders will assume. For example, most financial institutions engage in risk-based lending. This means they use a tiered rate based on an applicant’s “creditworthiness” and other criteria. In many cases, the interest rate you’ll pay on your auto loan is determined almost entirely on your credit score. The lower your credit score, the higher your interest rate will be.
The other consideration when determining how much you’ll pay for your vehicle is your loan duration. The longer you pay for the loan, the higher interest rates some lenders will charge.
Using an Auto Loan to Boost Your Credit Score
Review your credit score well before you intend to purchase a new car. See if you can make improvements in the time leading up to your car purchase that will help you lock in a lower rate.
If you already financed your vehicle and received a higher interest rate, there are still opportunities to lower your total interest cost. By making your auto loan payments on time, every time, you’ll help to increase your credit score.
We’re Here to Help!
Credit scores affect whether you will be approved for a loan and how much you will pay in interest. If you have questions on how to improve your credit score, please stop by any branch location or call us at (409) 241-2248
If your credit score improved since you purchased your vehicle, switching your auto loan from your current lender to DuGood may significantly reduce your total interest payments. Refinancing is quick and easy!
