When it comes to car financing, your credit score plays a crucial role in determining your ability to obtain a loan and the terms of that loan. A credit score is a numerical representation of your creditworthiness, based on your credit history and financial behaviour. In short, it is a measure of how likely you are to repay your debts on time.

Why are credit scores so important in car financing? Let’s take a closer look at the reasons why.

A high credit score can help you get approved for finance

Firstly, a good credit score can help you qualify for a car loan. Lenders use your credit score to assess your risk as a borrower. A high credit score indicates that you are a low-risk borrower, meaning that you are more likely to repay the loan on time and in full. This makes you a more attractive candidate for a loan, and lenders may be more willing to approve you for financing.

On the other hand, if you have a low credit score, lenders may view you as a higher risk borrower, which could make it harder for you to qualify for a loan. In some cases, you may still be able to obtain financing, but you may be subject to higher interest rates or less favourable loan terms. This can make your car loan more expensive in the long run.

Your credit score can impact your interest rate

Secondly, your credit score can also impact the interest rate you receive on your car loan. Interest rates are the cost of borrowing money, and they are determined by several factors, including your credit score. In general, borrowers with higher credit scores are more likely to receive lower interest rates, while those with lower scores may be subject to higher rates.

Why does this matter?

Even a small difference in interest rates can add up to significant savings over the life of a car loan. For example, let’s say you’re financing a $20,000 car over five years. If you receive a 5% interest rate, your monthly payments would be around $377 and you would pay a total of $22,645 over the life of the loan. However, if you receive a 10% interest rate, your monthly payments may be around $424 and you would pay a total of $25,438 over the life of the loan.

That’s a difference of $2,793 in total costs, just because of a lower credit score.

Your credit score can impact the amount you can borrow

Thirdly, your credit score can also affect the amount of money you’re able to borrow. Lenders use your credit score as well as other factors to determine your credit limit or the maximum amount they are willing to lend you. If you have a high credit score, you may be able to borrow more money than someone with a lower score.

This can be important if you’re looking to finance a more expensive car or if you need to borrow additional funds to cover other expenses related to the purchase.

Good credit gives you the power to negotiate

Finally, having a good credit score can also help you negotiate with lenders. If you have a strong credit history and a high score, you may be able to use that as leverage to negotiate for better loan terms or a lower interest rate. This can help you save money and make your car loan more affordable.

It is a good idea to know what’s on your Credit Report and to check it regularly. Equifax allows you to get a Free Credit Report once a year.

Your credit score is a crucial factor when it comes to car financing. It can impact your ability to obtain a loan, the interest rate you receive, the amount of money you’re able to borrow, and your ability to negotiate with lenders. That’s why it’s important to keep an eye on your credit score and take steps to improve it if necessary. This can help you save money and make your car purchase more affordable in the long run.

If you’re looking for bank-beating car finance and would like more information, speak to our friendly Finance Consultants today on 1800 538 287 to chat about your specific vehicle finance needs, or simply get an obligation-free instant online quote now and your personal Finance Consultant will be in touch with you asap.