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Credit Score and Other Factors When Buying a Car

Your credit score is one of the most important factors in financing a car. Simply put, credit scores measure the likelihood of people paying back loans. When you go to buy a car, whether you’re buying from a private seller, dealer or on an online auction site, your credit score can strongly impact your ability to obtain financing and the interest rate you receive. 

What credit score do I need to buy a car?

The answer: it depends. Credit scores are most commonly gauged on a scale of 300-8501.  The higher the score, the better your credit. Better credit means lenders believe there is less risk in extending you a loan. Having a low credit score could mean that you won’t qualify for a loan or be offered the lowest interest rate available - and as a result, you’ll pay more over the life of the loan. 

Lenders commonly assign certain designations to credit scores to identify high and low risk loan recipients. If a lender determines that an applicant is low-risk (i.e. has a high credit score and minimal outstanding debts), he or she will probably be more willing to offer a loan at a favorable interest rate.

There isn’t a specific credit score needed to buy a car, but typically, the higher the score, the better your interest rate. If you have a low credit score, a used car purchase could be an option you may want to look into. Lenders may be more willing to offer you used car financing because the cost is typically lower than that of a new car, constituting less risk for the lender. 

What other factors are considered?

An excellent credit score doesn’t guarantee an auto loan at a low interest rate. Lenders also consider the following factors in order to get a big-picture look at your creditworthiness before offering you financing options.

Lenders look at two different types of DTIs: the front-end ratio and the back-end ratio. The front-end ratio shows the percentage of income that would be needed to pay housing expenses, including your monthly mortgage payment, real estate taxes and homeowner’s insurance, while the back-end ratio factors in these housing costs plus all other debt payments each month, such as credit card bills and student loans. To find your percentage of either, simply add your monthly expenses and divide by your monthly income. The mathematics of improving your DTI are simple: decrease your existing debt (or increase your income).

Knowing your credit score upfront and where you are on the credit spectrum can save you negotiation time and hassle when buying your next car. You should be able to check your credit score regularly with the free report available from the major credit reporting agencies once a year and from services like Credit Karma.

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