What Credit Score Do I Need to Buy a Car?
How cool is this? You’re buying your first car and starting your true financial life as an adult. Of course, you will need a car loan to get you started, but you should still take time to pat yourself on the back — this is a big step. You may feel a little stressed. That’s okay; many of us remember taking a taxi or hitching a lift with a friend to the dealership before driving back in your funky wagon.
We bet this is a big deal to you, as it was to us when we bagged our first cars. You will undoubtedly feel as free as a bird since you go wherever you want, whenever you want, with nothing but the level of petrol in your tank holding you back. There is truly nothing like it. The independence, fulfilment and happiness your car will bring you is unbeatable.
For more practical reasons, it’s difficult to succeed in this life (or even to do the bare minimum really) without a set of wheels. Those who live in urban areas have access to fantastic public transport so these guys will not necessarily need their own car; however, for the rest of us, your own transport will ensure you can arrive promptly to interviews and then get to work in a timely fashion after you undoubtedly receive the job.
Besides work, a car is a necessity for going to the supermarket to obtain your weekly food shop; to the clothes shops to ensure you look great for that interview; to visit your friends, family or acquaintances; to get to a party; to go to the cinema or to just have a great day out exploring the area. Whatever you have to do or feeling like doing, chances are, you are going to need a car to do it.
Buying Can Be Complicated
As with most things in life, however, unless you have the cash to buy the car outright (which, unfortunately, only a very small percentage of people have this kind of money), you will need to pay for your machine with some sort of financial product from specific auto loan companies. Possibly unlucky for some, but your credit score is going to play a huge role in whether or not auto loan companies actually approve your application for said financial product or not. We know that this can cause a lot of distress — you are not alone, unfortunately. It’s just a fact of life.
Until now, depending on your life experience, you may have deemed your credit score as a rather insignificant number. Well, this isn’t really the case since this three-digit code will be the backbone (however strong or weak it is) that underpins every single financial decision you have to make. Applying for financing plans from auto loan companies is most likely the first time you will encounter your credit score as being significant. However, if you are in the market purchasing some property, this figure will help you become approved for that too. To be honest, everything can need a loan to finance it at some point or another, it just depends how expensive your personal tastes are.
So, this credit score thing — what is it, how is it determined, and how high does it need to be to gain approval for a financial product from an auto loan company?
The FICO score is the most used method of calculating your credit score in Canada today, so we are not going to shy away from this — we’ll be discussing it. However, we must cover some basics in order to answer these questions appropriately. Let’s dive right in.
A credit score is basically a calculated figure which demonstrates how reliable you are to the auto loan companies — i.e. the likelihood of you being able to repay the loan each month. It probably does not come as a shock to you that lenders will not be trusting your word; they will always want stronger proof. Why? Well, if it was not already obvious, they’re pretty much just giving you money with the hope that you will, in fact, be stable enough to pay it back over time. It seems quite mad when you think about it, doesn’t it?
There is some method to this madness though. If you think about it for a second, money is accrued when debt is applied so, looking at it this way, you will be able to see why the auto loan companies do what they do. Bear in mind that there are two major ways that your credit score will alter the conditions of your car loan: interest rates and the time for repayment. Don’t fret, we’ll be talking about these in detail a bit later on.
The fact that, as we’ve already mentioned, your credit score is a numerical expression of how high the chances of you paying back the loan are, makes a lot more logical sense when you realise how it’s figured out.
How They’re Calculated
You know how secret the recipe for KFC’s chicken crumb is? That’s how confidential the actual arithmetic that’s put into deciphering your credit score is. We know, seems a little “too much” doesn’t it? Anyway, there are some aspects that we do indeed know about. The most crucial aspect, the one which is most highly regarded, is how often you repay all of your existing financial commitments on time (or even in full if you are feeling rich). The other aspects that go into the calculations seem to get lost within the sheer importance of your timely (or not so) repayments.
Okay, trust us. While we know it seems like we’ve taken a while to get here (it was necessary), we’ve finally arrived at the part where we talk about what sort of score you should be aiming for so auto loan companies will approve your application. Firstly, we’ll discuss how lenders tend to classify and group buyers and finally, we’ll have a chat about the ways your score can impact the terms of your loan.
It’s best to note here that we are only offering rough guidelines. Each auto loan company will have their own categorisation checklists, meaning we cannot ever say for certain any hard and fast rules (simply because there isn’t any.). If you are sat here thinking your credit score is too abominable to ever be approved for a loan, you are wrong. Regardless of the number, you will be able to secure a financial product. But remember, it will change how brilliant your final loan offer actually is. Okay, now let’s focus in on the categories.
The first group is where all of you with credit scores between 300 and 500. You are known as Deep Subprime buyers and present the most risk to lenders. If you fall into this section, you will receive longer loan repayment schedules, as well as much higher interest rates compared to others. To be completely transparent, you need to undergo credit repair right now. It’s essential because the amount of money you could save by removing yourself from this category is astonishing.
Up next are the Subprime buyers who have credit scores between 501 and 600. Unfortunately, you still aren’t in a very good position here either. We know, it’s a hard life. Obviously, it’s a step away from the first category, Deep Subprime buyers, but you still won’t want to brag to your friends and neighbours about it.
The third category is officially known as the Nonprime category or middle tier. Those of you in this section will be rocking credit scores of somewhere between 601 and 660. You guys are pretty average; you aren’t great, but you aren’t as risky as the previous two either.
Finally, up in the dizzying heights of top are the Prime and Superprime categories. Prime houses scores that fall between 661 and 780, while the Superprime roof shelters scores from 781 to 850 (you have to be pretty darn special to end up here). If you have worked hard and ended up in either of these two sectors, you deserve some chocolate cake and a high five because you present virtually no risk to auto loan companies. Consistent loan repayments over a number of years that are always on time and the desired amount is the big thing that has put you to the top and you clearly deserve it.
It possibly goes without saying that the higher your credit score is (the higher the better), the less interest you will be conditioned to pay in your final loan terms. On the other hand, the lower your credit score is (therefore, worse), the more interest you will be required to pay. Why? Because interest is never there to pay off the actual vehicle, it just acts as a buffer — or safety net, if you will — to the lender.
The other issue you will face with your credit score on your car loan is the determining of the terms of your loan — i.e. is it a long-term or short-term kind of deal? You may think you can skip over this bit and be done with it, but we would encourage you to stay. While the length of your financial product seems insignificant at the present moment, you will be glad you delved deeper in 6 months’ time.
For some, this aspect can be tricky to wrap your head around, so we’ll take it slowly. When you finance a car through a loan, you do not actually own the vehicle until you have finished repaying it. For instance, if your car breaks down one evening, you are shelling out wads of cash for something that isn’t really even yours. So, with this in the forefront of your mind, the shorter the payback time is, the higher the chances are of you paying it all back and completely owning it before you have had to invest more money into the beast.
Remember when we said that you could secure a financial product from an auto loan company with a less-than-ideal credit score? This was all true. But it’s essential to bear in mind that the loan specifics will consider your credit score with high regard which could negatively impact the conditions of your final loan offering. Be prepared with all of the info you need when heading to that dealership.
If you don’t want to put all the work into securing a financial product from auto loan companies, then give us here at autoloans.ca a quick phone call. We conduct the entire process for you, allowing you to sit back, relax and take the pressure coat off for a while.