A person’s credit score is the equivalent of an adult report card. It is what banks and lending institutions use to determine the likelihood of loan repayment, and ultimately, if they will give loan approval. When applying for a loan; whether it be a payday, auto, or home loan, your credit score paints a picture for the lender. It lets the lender know a lot about your past and present ability to be financially responsible. Your credit score is the only tool that the lending institution has at their disposal in making a decision on whether they want to fund your loan.
Take for example, someone with poor credit who is applying for an auto loan. This person is not likely to get financing through a typical lending institution, such as a bank or credit union. They usually end up at a “buy here, pay here” dealership or with an auto finance company that specializes in the handling of loans for people with poor credit. Because of the perceived risk involved in financing a person with bad credit, the lender will limit the amount of money they are willing to lend, and will likely impose a higher interest rate. In loaning money to a person with a poor credit score, the lender assumes a considerable risk and therefore off-sets this risk by lending a smaller amount of money with a high interest rate. For instance, a person with poor credit may want a twenty thousand dollar loan to purchase a vehicle they have picked out. Because of their poor credit score, the lending institution may only be willing to loan ten thousand, thereby limiting their risk if the person defaults on the loan.
Increase Your Chances
There are a couple of ways that people with poor credit may be able to increase the amount of the loan and/or decrease the loan’s interest rate. One is by utilizing a co-signer. A co-signer is a person, usually a friend or family member, who guarantees to the lender that you will make timely payments. A co-signer willingly accepts responsibility for the loan in case the primary borrower defaults on the payment. Basically, a co-signer gives the lender assurance that the loan they are financing will be repaid, thereby greatly lowering the risk the lender takes in financing a person with poor credit history.
Another way you can give yourself a better chance of getting approved is if you can show evidence of a steady income. Lenders vary in terms of requirements, but if you can prove that you have worked at the same company for a period of two or more years, it will significantly help in securing a loan.
A large down payment will also help in obtaining approval for an auto loan. This shows the dealer that you are a serious buyer and that you are not likely to default on your payments. A large down payment may also help keep your interest rate low and more manageable. The bigger the down payment, the better the loan terms and likelihood that you will get approved.
For more information in qualifying for auto loan financing, please click here.