Can I Qualify for Financing to Buy a Car?

At Lawrence Mitsubishi, we often have customers who want to buy a new or used car, but they aren’t certain whether they can qualify for a car loan. That isn’t a new concern – car buyers have faced that daunting question for years. We understand this, so we’ve gone to great lengths to build relationships with several major banks in the area, so we can provide a number of options to help those with a weak credit profile.

In April of 2017, the average American’s FICO® Score was 700, which is generally considered to be good, but we often have prospective buyers whose FICO score comes in around 550. While the specific reasons behind a low credit score can have a bearing on your credit worthiness, it’s usually possible for us to help our customers find reasonable financing to help them drive home in their new purchase. We regularly work with lenders that are willing to look behind a mere 3-digit number. In fact, our #1 priority is to help you match up with the right lender.

It’s helpful to understand what your credit score really means, so here’s a quick explanation of how your credit score is derived.

WHAT MAKES UP MY CREDIT SCORE?

A credit score is a numerical rating of one’s creditworthiness, based upon, as a minimum, criteria such as:

• Total debt – depending upon the lender, this may include all expenses, including rent, utilities, groceries, etc.
• Credit Utilization Rate – this typically looks only at revolving credit, such as credit cards and line of credit.
• Payment history – this looks at the number and severity of late payments.
• Type, quantity, and age of credit accounts – too high a number of active credit accounts, particularly those which have been recently established, can be seen as a negative by some lenders.

There are several credit reporting agencies in the U.S., but the three largest are Equifax, Experian and TransUnion. You may have heard of the FICO Score, but FICO (The Fair Isaac Corporation) isn’t actually a credit reporting agency. FICO developed the FICO credit score, but that score is compiled from data supplied by the major credit bureaus, as FICO doesn’t actually collect any credit report data.

A perfect FICO score is 850, but only about 1.2% of all scores hit that mark (the average FICO score in the U.S. in mid-2019 was 703). And while FICO isn’t the only score used in the U.S., it’s considered in over 90% of all U.S. lending approval processes. So, it’s a good metric to assess how a lender may judge your credit worthiness. Your score may vary slightly from one agency to another, but will almost always be so similar as to make the difference insignificant.

Here is how Experian generally rates FICO scores:

300-579                 Very poor

580-669                Fair

670-739                 Good

740-799                 Very Good

800-850                 Exceptional

HOW WILL YOUR CREDIT SCORE AFFECT YOU?

First, keep in mind that your loan application will only request financing for the amount not covered by your down payment. So, the larger amount you can put down, the smaller balance you’ll need to borrow. That can have a dramatic effect on whether your loan application will be approved or not.

Different lenders may have different minimum scores they consider to be acceptable, but most have a few ways of accommodating borrowers with low scores. They may charge a higher interest rate or shorten the maximum term (both of which will result in a higher monthly payment).

When a lender considers whether you’re an acceptable candidate for a car loan, they’ll look at your FICO score, but some positive changes to the previously mentioned factors can make a difference. There are a few things to consider doing before seeking financing that can improve your position.

HOW CAN I IMPROVE MY CREDIT WORTHINESS?

• Your total debt is a major factor, and any reduction of that debt will help, so try to pay off as much debt as possible. In particular, pay off or reduce the amounts owed on any lines of credit or revolving accounts, such as credit cards. That will not only reduce your total debt, but will also improve your credit utilization ratio, both of which are important aspects in the compilation of your credit score.
• Be very protective of your payment history, avoiding any late payments. A history of missed or late payments is generally a red flag to lenders – it could indicate a customer who may prove to be a poor risk. Delinquencies can remain on your report for seven years.
• While revolving accounts that are kept in good standing can signal a responsible borrower, don’t go overboard. Two or three credit cards with regular charges and payments are generally a good level. Avoid opening a dozen credit accounts just because you can. But don’t expect an account you’ve had for years to say much about your credit worthiness if you’ve very rarely used it.
• Don’t apply for new credit cards, thinking it may show that other lenders consider you a good risk. While an additional amount of available credit may bring some benefit to your utilization ratio, it can also have a negative effect on your worthiness for additional credit. However, don’t cancel unused credit cards, as that will adversely affect your credit utilization ratio.
• Avoid unnecessary credit checks. Most banks or credit card issuers will allow their clients a free periodic credit check, and these normally won’t be recorded against your rating as credit checks. But if you apply for an account for a new card or a charge account at a department store, those credit checks will appear on your file and can be looked upon by a lender as another credit liability. Credit checks can remain on your report for two years.
• Check your credit report periodically and dispute any discrepancies you find. It’s not uncommon to find errors, so you’ll be better off finding those and getting them corrected before you go shopping for your next vehicle.

If you find your credit score is discouragingly low, don’t despair. Lawrence Mitsubishi is usually able to help car buyers with poor credit secure financing. Our #1 goal is to help you find a manageable way to afford your next vehicle and we’re ready to work with you to make that happen!