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When you go to a car dealership looking to purchase a vehicle, you’re probably already considering a variety of factors. They likely include: Whether to shop new or used, vehicle make and model, dealer pricing, warranty, color, mileage, and so on. However, there is something a lot of shoppers overlook, at least early in the process, and that’s how their credit score can impact their ability to make a purchase. This is a significant part of the car-buying experience and should not be glossed over.
Most car shoppers require some financing for their vehicle purchases, whether buying new or used. So, it’s important to understand how your credit score affects buying a car and what your purchase does to impact your score over an extended time period. Put simply, if you need to finance your vehicle you should be aware of your credit.
If you do not have 100% of the money needed to pay for the vehicle you want, you will need financing to cover the difference. The money to finance your purchase will likely need to come from a credit union, bank, or the car dealer or auto manufacturer you are buying from.
If you are borrowing money, there is almost always interest attached (unless you are taking part in a special sales event or manufacturer’s promotion) and you will need to make monthly payments, over a multi-year period, to pay back what you borrowed — plus what you owe in interest. Your interest rate will be based, in part, on your credit score.
In addition to your credit score, other criteria that can affect your interest rate include whether the car you buy is new or used and how many years you need to repay the loan.
Yes, many car dealers look at income and proof of it if you intend to finance your vehicle purchase with them. It’s part of how they protect themselves from risk, and they make sure your monthly income is stable, predictable and high enough to keep up with your monthly payments.
To verify employment information, it’s common for dealers to ask for pay stubs or bank statements to review. In rare instances, a year or two’s worth of W-2s may be asked for.
However, the ultimate proof of employment typically comes from a credit check. To an auto dealer, the higher your credit score, the lower risk you pose to them.
Be cautious of car dealers that do not require proof of income. Many of those types of dealers are predatory lenders looking to take advantage of purchasers. They often give bad loan terms with high interest rates, so exercise your due diligence before signing paperwork with this kind of dealer.
Different lenders work with various criteria, with each of them setting their own threshold for financing terms and availability. According to Equifax, one of the three major credit-reporting agencies — along with Experian and TransUnion — 580 to 669 is a fair credit score; 670 to 739 is good; 740 to 799 is very good; and 800-plus is excellent.
A good rule of thumb is the higher your credit score, the more buying power you have. Not only will you get approved for a loan with a high score, you will also get a lower interest rate and better terms. Other factors that can influence loan terms include having a down payment and if you plan to trade-in a vehicle as part of your purchase transaction.
Getting an auto loan can do wonders to help build or increase an individual’s credit score, but if you fall behind your payment schedule, or fail to make payments altogether, your credit score will suffer. According to Experian, your payment history makes up 35% of your FICO® Score. This is key, as this is the credit model most lenders use.
There are also short-term considerations. For example, it’s important to know that when a car dealership runs your credit, it usually goes down. This is because when your credit is checked, a hard inquiry is entered into your credit history, lowering your score. A single hard inquiry is likely to drop your score a couple to a handful of points, but multiple inquiries over an extended period of time can add up. With your FICO® Score, there is a limited buffer window that’s intended for things like car shopping so that your score won’t take much of a hit when checked by a dealer. However, credit checks will not always affect your score, and at DCU, we offer our members free monthly FICO® Score monitoring.
Digital Federal Credit Union, a not-for-profit cooperative, serves more than one million members and their families spread across the United States. Since 1979, we have provided our members with consumer and business banking, and lending services. Whether purchasing a brand-new dream car or looking to get a used economy vehicle for long commutes, we offer flexible terms and low auto rates. Regardless of where you purchase your new or used vehicle, you could benefit from auto financing provided by DCU.
View DCU’s auto loan resource center to check out our self-help calculators, offers, reviews, and more; or, you can start our three-step loan application. Note that getting an auto loan requires you to be a DCU member. However, you may submit a loan application for consideration before applying for and finalizing your membership.
Please note, membership is required to open a DCU Auto Loan. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.