I need to buy a car, but I don’t know whether I’ll be approved or denied.
If I had a nickel for every time that I’ve heard this statement. Before I embarked on my financial journey, I had the same fear. Had I been smart, and actually sought answers before going to the dealership, my experiences probably would’ve been better.
Research is golden. I can’t stress how important it is to do research beforehand. The more information you have, and the greater your understanding, there’s less likelihood of making a decision that you’ll later regret. What should you research? Most would recommend that you research the type of vehicle to ensure that it fits your needs. While that’s great advice, I would also recommend that you explore your financial standing. Your finances play a significant role in the car buying experience. This is especially true if you’re planning to use financing to pay for the vehicle.
A number of factors work together to determine whether an auto loan application will be approved or denied. While the credit score may be the first to come to mind, there are others such as the credit report.
The credit score is the sum of key factors captured in the credit report. From highest to lowest rank, they include: Payment History, Amount Owed, Length of Credit History, New Credit, and Credit Mix. Each of these factors carry a certain weight, which is used to calculate the overall score. The credit report is a detailed history of how you’ve managed credit. For instance, it shows when an account was opened, whether you made payments on time, the types of accounts that you have or had, etc.
In relation to an auto loan, the credit report tells the lender how you’ve managed credit in the past, and what they can expect from you in the future if they decide to lend you any money. The credit score is a numerical value that rates the report. Both the score and report are used to determine whether you’re qualified to be approved or denied for the loan. If approved, the score and report determine the details of the loan such as the loan amount, interest rate, and term. The higher the score, the lower the interest rate. The lower the score, the higher the interest rate. A similar rule of thumb applies to the loan amount. The higher the score, the higher the loan amount. The lower the score, the lower the loan amount. The loan term, meaning the number of months you’re allowed to pay off the loan, can vary.
For example, if a person’s credit score is on the lower end of the spectrum (i.e. 500s or low-mid 600s) they can expect that the interest rate will be relatively high. That’s if they’re approved at all. Approval rates decline with lower credit scores.
As it pertains to research, know your score and review the details of your credit report prior to attempting an auto loan application. The last thing that you want is to be blindsided at the dealership (hint…it’s not fun!)
Some lenders actually allow you perform a pre-approval, without actually impacting your credit score. If you know your score, and have reviewed your credit report, and still want to get insight into your chances at an auto loan, try a pre-approval. Keep in mind, that the results will be based on general information and won’t factor in the details of your credit report (since it’s not actually pulling your credit).
If the pre-approval returns favorable, the next step is to attempt a full application, where the lender actually checks your credit. Best case scenario, you’ll be approved and you’ll have your financing squared away before you arrive at the dealership. On the other hand, if the pre-approval is denied, it may be an indication that you need to re-evaluate your financial circumstances. That may mean that you delay the purchase until you’ve addressed the details of your credit report and increased your score.
From my own experience in fixing my credit, ultimately raising the score by 160 points, as well as the successes that my clients have experienced, it’s better to address the problems before attempting to make a purchase. Doing so saves money, time, and headache.
When my clients are ready to take control of their financial circumstances and remove the uncertainty described above, they jump on a call with me. I’d like to help you do the same. Click here to schedule your free consultation today.
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