The car loan industry is notable for its complexity, several players, and various types of lending funds. Getting a car loan is not always easy, even with good credit. Those who do not have a handsome credit score have to face some trouble while applying for a car loan.
However, different financial services now offer vehicle financing options, even for those who lack decent credit scores. That’s why it pays to understand some of the factors your credit score will be impacted by when applying for a car loan. Here are some factors that affect your credit score and will make the difference between getting approved or rejected for a car loan when applying.
- Repayment Schedule on Different Credit Accounts
Whatever loan you have taken so far, the repayment schedule matters a lot when it comes to your credit score. For example, if you are paying your car loan on time, then it will be a good indicator of your repayment capacity.
However, if you are habitually late in making payments to any of the financial institutions, it will be recorded as a negative factor on your credit reports and this may result in lower scores. In addition, the current status of all your open and active lines of credit is also considered a factor that affects your credit score when applying for car loans.
- Pending Loans Against Your Name
The amount of borrowed money is vital in considering your credit report. The higher the outstanding balance on your loans, the lower will be your credit score.
The borrower with a higher debt-to-income ratio has a lower credit score, so if you plan to apply for a car loan, then be sure that you don’t borrow more than 60% of your monthly income.
- Depth of Credit History
The time all your accounts have been open and active will affect your credit score. If you haven’t been using any lines of credit for an extended period, it will lower your credit score.
Your credit score will also be affected by the prolonged period when you have been late in making payments and have not paid the full amount of your outstanding balance. However, using different tools like a car loan calculator can always keep your credit history clean.
- Credit Card Decline Ratio
Whenever you apply for a car loan, a certain percentage of your application is weighted against how many lines of credit charges were declined or declined within a particular period.
The higher the decline ratio, the lower your credit score will be. Also, it is important to review what has led to these declined charges and ensure you don’t repeat them in the future.
- Payment History of Your Existing Credit Cards
If you are applying for a new car loan, pay attention to your existing credit cards because they can adversely impact your credit score. If you have any charges or payments that may be in arrears or are past due, it can result in a decline in your credit score. So pay all the charges on time and check your billing statements, so no erroneous charges or bills are lingering against you.
Final Words
While knowing what factors affect your credit scores when applying for a car loan is necessary, you also need to understand that not all the factors are negative. The credit report will be the most important part when it comes to getting approved for a car loan and having a smooth process.
