There are lots of things to think about when considering the purchase of a new vehicle—from make and model to mileage and more. But it’s also a smart idea to think about your credit score, and how it might influence your ability to buy your new ride.
Your credit score will likely have a major impact on the size of any auto loan you’re able to take out, and it can even play into things like insurance. How, you ask? Don’t worry; that’s why we’re here. Read on and learn all about how credit can influence the price you pay for a car—whether you’re buying new or used.
How to Pay for a Vehicle In North America or the UK
When it comes to purchasing a vehicle in North America or the UK, most people go through one of several channels:
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Paying in Cash
This is just as simple as it sounds—you hand over the money, and the other party hands you the keys to your incredible new car. It’s also the preferred method for many secondhand vehicle transactions; buyers who find sellers directly through word of mouth or online via Craigslist, Facebook Marketplace, or Kijiji tend to ask for the cash up front. But plenty of people pay cash at dealerships, too—that is, if they’ve got it on hand.
Typically, your credit score won’t play into a cash transaction—since you’re handing over the entire cost of the car up front, there’s no reason for the seller to consider you a lending risk and they won’t care about your credit. The downside is, many people can’t afford to hand over the money for their new car in cash all at once. That’s where options like financing and lending come in—and that’s where your credit score matters, too.
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Financing
When you finance a vehicle, you take out an auto loan to cover the purchase and slowly pay it off in installments over time—until you eventually own the vehicle. You’ll probably pay a portion of the price up front as a downpayment. Think of it like a car mortgage!
Of course, you need to be approved for a mortgage before you can get one, and your credit score has a lot to do with whether that approval is granted. As you can probably imagine, auto loans aren’t much different. We’ll talk more about how your credit score influences the type of auto loan you can get after we cover leasing.
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Leasing
At first glance, leasing can seem very similar to financing. In both cases, you’ll make a downpayment and monthly payments over a fixed period of time.
However, leasing differs from financing in that you don’t actually own the vehicle—instead, you’re paying to use it over the term of your lease. When that period’s up, you’ll have the choice to return the vehicle or purchase it for the remaining principle, plus any associated fees (it’s what a lot of people do with their phones).
Of course, leasing still means there’s a lender assuming a certain amount of risk. The difference is basically just that instead of lending you money for the car, they’re lending you the car itself! That doesn’t change the fact that they’ll be counting on you to make your monthly payments—so your credit score will matter here, too.
How Do Lenders Determine Your Interest Rate?
Whether you’re financing or leasing, your credit score tells lenders how much risk they’re taking by dealing with you. As such, your credit score affects your ability to finance or lease a vehicle, but in different ways. Here’s a breakdown of how it works for both categories:
How Your Credit Score Affects Financing a Car
Typically, dealerships don’t provide capital for an auto loan themselves. Instead, they use a lender (such as a bank or credit union). These often differ depending on the type of vehicle being purchased (for example, a BMW dealership probably won’t use the same lender as your local used car lot).
In addition to primary lenders (banks, etc.), there are also brokers that work with numerous finance firms, as well as companies that operate a hybrid model where they can arrange both the financing and help you find a car (GetCarFinanceHere.com is an example of one such company).
When you apply for an auto loan, the lender uses your credit rating to help determine the following:
- The amount of money they’re willing to lend you (the principal)
- The length of time you have to pay back the loan (the term)
- The amount of interest you’ll pay each month (the rate)
And you guessed it—the higher your credit score, the more favorable each of these conditions are likely to be for you. For instance:
- Credit scores above 700 are generally considered “prime”. If your credit score is in this range, you’ll likely get access to larger loans, with more time to pay them back and lower interest rates (0-4%).
- Credit scores from 500-700 won’t make it impossible to get a loan, but in many cases you’ll only qualify for “below prime” rates (3-6%). That means you pay more interest each month, which drives up the total amount you’ll end up forking over for your vehicle.
- If your credit score is under 500, the loans you can qualify for get much less favorable. Expect rate anywhere from 6.5-16%, with tighter timelines and smaller loan amounts as well. Some lenders may not let you borrow from them at all.
How Your Credit Score Affects Leasing a Car
Leases also have principal amounts, terms, and interest rates. However, the terms tend to be a little less varied—a typical leasing term is 36 months, which is about the same as the extended warranty on most vehicles.
Rates tend to be a little lower for leasing as well, because you aren’t paying for the entire value of the vehicle. Instead, you’re paying for the depreciation of the vehicle over the term of the lease (along with interest, rent charges, taxes, and fees). But your credit score will still play a major role in what leasing rates you’re offered.
Can You Finance Any Vehicle (New, Used, Vintage, Classic)?
Getting an auto loan or a lease for a new car is fairly straightforward—the staff at most dealerships will be only too happy to explain the process and help you make it happen. The same goes for used car dealerships. But buying a vintage or classic car is different.
Most vintage and classic car transactions take place directly between individual buyers and sellers. But the amounts of money involved tend to be much greater than the costs of buying a used Honda Civic from someone you met on Craigslist.
That means people who want to buy classic cars often need to borrow money. However, since they aren’t going through a dealership, they often can’t do it from a traditional lender like a bank.
This is where those finance firms and hybrid-model-companies we mentioned earlier can be especially useful. For example, some companies specialize in loans specifically for classic cars. In many cases, these loans are unsecured—meaning you won’t even have to put your new car up as collateral!
You can also take out a personal loan to help finance the purchase of a vintage or classic car. Just be advised that personal loans often come with higher interest rates than loans for a specific purpose—you might get a rate of 8% with a credit score above 700, while your rate could be as high as 18% with a credit score in the low 500s.
Borrowing Wisely for the Car of Your Dreams
We always recommend considering your credit score before you apply to finance or lease a vehicle—but that’s not all. If you choose to finance your purchase, you should also think about the kind of loan you’ll need to take out, since interest rates can vary widely from one kind of loan to the next.
Finally, consider the lender you’ll go through and how they’ll structure your loan. Will they help you find a car you can afford and give you the best possible terms, or will you end up with interest rates you can’t afford?
With a little research and financial knowledge, it’s easy to buy a car you’ll love without getting a bad deal on a loan or a lease. Use what you’ve learned above to get started, and feel free to leave us a comment if this advice helps you out!
