Your Credit Score
Before we even get to the getting a car loan part, first you must understand what a credit score is. Just like many aspects of our life, a credit score is an imaginary number that helps you get things just like grades and what you have in your bank account. Even though it’s imaginary, it affects your financing options that plays an important role when you want to buy a house, get a job, get a car loan, and probably a lot more of which I am unaware.
A credit score is a three-digit number that usually ranges from 300-850 and represents your credit risk. Here’s what’s considered bad, fair, average, and excellent.
Excellent Credit Score: above 720
Average Credit Score: 690-719
Fair Credit Score: 630-689
Bad Credit Score: 300-629
Here’s How You Get Good Credit Or Bad Credit:
To build good credit, you should be paying all your credit card debt on time, all the time. To get bad credit: don’t pay your credit card debt on time or only pay your minimum until your credit card debt becomes unmanageable. There may be a little more to it like tax liens, bankruptcies, or legal judgments, but at the end of the day, that’s how you affect your credit score.
We millennials have made our way to make up the largest segment of the workforce, taking over the generation before us - the baby boomers. We’re slowly beginning to need a good credit score in order to buy a car or buy a house. Before the millennials joined the workforce, our credit scores are usually “bad” because we’re still paying for college, but it is relatively low compared to richer people’s debts. The goal during these working years is to build your credit by keeping up with payments so that you can get car loan options or be approved for a mortgage.
How To Apply For An Auto Loan:
It might sound obvious and look obvious, but still I don’t know who or what will loan me a car or for what reason. Call me ignorant because I am, but if you’re silently agreeing with me, we can learn what this is together!
What Is A Car Loan?
A car loan or an auto loan is a personal loan of which the proceeds go towards buying a car. The lender gives the borrower money to purchase a car with the contingency that the borrower will pay the lender back with interest that usually follow an average of auto loan rates depending on your credit.
Okay, simple enough, but what does this have to do with my credit?
Do You Have Good Credit Or Bad Credit?
Lenders will always look at your credit history and your assets in order to decide whether or not to lend you the money. Usually with bad credit, your loan options are few and more difficult to get. If your credit score is bad, the chances are that they may not lend you the money or if they do, the average interest rate will be high. They check your credit score to see how well you pay back your credit card bills and if you’re often late on paying or miss payments often, then you are considered high risk.
Your assets include anything that is worth enough to be considered collateral. If you have a property, the bank or the finance dealer can take that if you owe them that much money. They check your savings accounts and checking accounts to see how you are doing with your money. It’s all about being responsible.
Okay, now we’ve learnt the basics, time for terms that might come up during your loan process:
Car Loan Rates:
The rate of interest your lender decides to give you based on your credit. As we learned earlier, bad credit score car loans come with pretty high interest rates. In general, with a good credit score, your interest rate should be around 4.5%. Bad credit score car loan rates can be up to 12.9%.
Car Title Loans:
Car title loans are a last resort kind of loan. This is when you give the title (ownership) to the lender as collateral until you’ve finished your payments. In the long run, since the auto loan rates are higher, you may end up paying much more than the car is worth.
Used Car Finance:
Used car financing involves borrowing money from a third party i.e. a bank or a finance company. The loan for used cars are smaller than new cars, but common auto loan processes determine that the interest rates are higher. The high interest rates make up the value lost with the smaller loan.
Auto finance is the process of paying back a car loan. When you can’t afford to buy a car right away, one of your choices is to finance a car and make monthly payments with an agreed upon auto loan rate from the lender.
Refinance Car Loan:
Auto loan refinance means that you borrow money from a lender to pay back the money owed on your car loan. The car is used as collateral if you miss a loan payment or cannot pay back during your auto loan term.
Your monthly car payment is decided by the car itself (new car vs used car), your credit score, and any assets that can be considered collateral in the case that you cannot make your payments. It would be a good idea to estimate your monthly payment that fits your budget. Your car payments can last as long as you want them to over 3-7 years.
Used Car Finance Rates:
Finance charges, in the long run, can save you money than financing a new car. Used cars have lower insurance rates meaning lower monthly payments and minimal registration fees. Loans will be smaller for used cars, but interest rates will be much higher.
Cheap Car Finance:
Car loans in Toronto follow all of these practices. So it’s great that we have learned how your credit score impacts whether or not you get a car loan and to get a good credit score, you should be paying off your credit card bill and student loans on time. If you do get a car loan with okay credit, then your average interest rates will be higher than if you have a good credit score. Your auto loan term can be as long as your budget needs. If you’re not picky about the car being used or new, used is the cheaper option in the long run and when you are car buying, remember to shop and compare rates. There, now we millennials are just that much smarter than we were before.