Auto industry veterans have a saying, "there's [a rump] for every seat". Translated, it means there's a car for everyone. The same can be said for auto financing. Whether your credit is excellent, poor, brand new or somewhere in-between, chances are you'll be able to purchase a car, thanks to the many financing options now available to buyers with a range of credit scores.
"Good" Credit is Relative
The credit score you need to buy a car can depend in large measure on who finances the car. Credit scores range between 300 and 990, depending on the model used to calculate the score. Likewise, credit score classifications ("excellent," "poor," for example) vary, not only among credit scoring models, but also among lenders. Your 680 credit score may only be considered "good" by Auto Lender A, but "very good" by Auto Lender B.
Type of Lender
If your credit score is high enough, you may qualify for "prime" financing, which, according to Autoloandaily.com, typically requires that your credit score be at least 680. If you're unable to obtain prime financing, however, there are numerous "non-prime," "sub-prime" and "deep sub-prime" lenders that specialise in financing automobiles for borrowers with credit scores as low as 550, sometimes even lower. Additionally, you owe it to yourself to also investigate financing through banks and credit unions, many of which make car loans and whose credit score criteria can vary widely from one institution to the next.
Type of Dealer
If you're among the below-prime borrowers who assume it's easier to finance a used car from an independent dealer than a new (or used) car from a franchise dealer (manufacturer-authorised car dealer), think again. While, in the past, many franchise dealers used financing networks that overwhelmingly consisted of prime lenders, the prevailing economy -- and, by extension, the overall decline in many consumers' credit scores -- has forced many franchise dealers to include below-prime lenders in their networks in order to continue selling cars. Further, several of the big automakers now offer below-prime financing through their proprietary lenders, giving borrowers with a wide range of credit scores easier access to the types of cars they want to purchase.
The amount of your car loan is reduced by the value of your down payment, which can be either in cash or in the form of another car you trade in. The more money you put down, the less you have to finance, the lower your monthly payment and the greater the likelihood that the lender may be more willing to accept a lower credit score.
You need to be aware that below-prime interest rates are almost always higher than prime rates -- sometimes much higher -- and can range from less than 10 per cent to rates that approach (or even exceed) the levels of some credit cards. The spread between non-prime, sub-prime and deep sub-prime interest rates is even more pronounced with used cars, which, historically, have carried higher interest rates than new cars. Before deciding on a new versus a used car, or before committing to below-prime auto financing, you need to fully understand the effect that a higher interest rate will have, both on your monthly payment, as well as on the total repayment cost of the vehicle over the term of the loan.
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- Edmunds.com: New Credit Scoring System Affects Auto Loans
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- CNNMoney.com: GM Buys Sub-prime Lender for £2.3 Billion
- Bloomberg Businessweek: Ford, Dealers Say Credit Access Helping Recovery in Auto Sales
- Loan.com: How A Down Payment Can Affect Your Car Loan Monthly Payments