There was a time when owning a car was an expensive commodity that not everyone had the privilege of owning. In today’s date, a car has become a necessity that almost every household owns and utilizes. But these vehicles are expensive and still not a very reasonable dream for everyone. Affording a new ride often requires external financing in the form of an auto loan. Your credit score determines this loan.
What is the credit score?
A credit score is a three-digit number that gives the lender an estimated idea of the person’s ability to manage their credit, or in other words, the consumer’s creditworthiness. It is a number that lies between the range of 300-850 and plays a massive role in the lender’s decision to offer credit. It helps the lenders evaluate the possible chances of the borrower repaying the loan in the future promptly. The higher the credit score, the better a borrower looks in the eyes of the potential lender. This score is based on several factors like credit history, total levels of debt, number of open accounts, and repayment history.
This credit score model was the creation of Fair Isaac Corporation or FICO, and financial institutions popularly use it. Even though there do exist other credit-scoring systems, the FICO score is by far the most used system.
How does a credit score work?
While purchasing a used premium car, your credit score can play a huge role in determining your financial status and capability. It plays a crucial role in the decision-making process of the lender to either offer the credit or not. If you were wondering how much credit score is required to buy a car, here’s an explanation for you:
- It has been established that those who have a credit score 640 or below, are known as subprime borrowers. When it comes to offering credit to such borrowers, lenders usually charge interest at a comparatively higher rate to compensate for the risk they are taking while providing the credit. They may also require a shorter repayment term under such a situation or ask for a co-signer for such borrowers.
- When a borrower owns a credit score of 700 or above, it is generally considered a good score, and it may even result in the borrower getting a comparatively lower interest rate. This results in the borrower having to pay less money in interest over the life of the loan borrowed.
- Any Score above 800 is considered an excellent score, and it makes the borrower the most desirable in the eyes of the lender.
While every creditor or lender usually defines its ranges for credit scores, on the other hand, the average FICO score is most used as follows:
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Excellent: 800 to 850
From the above what can be derived is that a person’s credit score is a statistical analysis of their creditworthiness and it directly affects the amount of interest they may have to pay for the credit they take out.
Higher the credit score = Lower the interest rate.
It is essential to mention that a person’s credit score is also responsible for determining the size of an initial deposit required to purchase a luxury car. If you wish to keep your interest rate low and consistent, you must maintain your high credit rate. Lender’s frequently reviewing their borrower’s credit scores, and this helps them in deciding whether to change the credit limit or interest rate on credit.
How is a credit score calculated while purchasing a luxury car?
While buying a luxury car, or any car for the time being, if you are wondering- “what does a lender look for in a credit?”, here is an explanation for you.
There are namely five main factors which are evaluated while calculating a borrower’s credit score:
- Their payment history
- The total amount owed.
- Length of their credit history
- Types of credit used.
- New credit is taken.
Here, the payment history of the borrower contributes around 35% to the credit score. It shows the lender the borrower’s punctuality when it comes to paying their debts. The total amount they owe counts for 30% of the total credit score and, it considers the percentage of credit that is available to the person which is currently being utilized. This is also known as “credit utilization”.
The length of credit history counts for 15% of the credit score. Where there is a more extended credit history, it is assumed that lending the borrower the credit is less risky because it provides more data to determine the payment history. The type of credit used amounts to 10% of the total credit score because it factors in the number of new accounts the borrower has and, how many new funds they have applied for recently. This results in credit inquiries and when the recent account was opened.
With a little smartness and the help of a creditor, you can make your dream of owning a luxury car turn into a reality! Always make sure to buy from a trusted owner like Auto Best and borrow from a trusted creditor only.