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Car Loans and Your Credit Score | What You Need to Know

Looking to apply for a car loan? Find out what you need to know and how your score compares.

08 November 2022Lloyd Smith 9 min read
Car Loans and Your Credit Score | What You Need to Know - minimum credit score

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It is normal for lenders to look into a prospective loaners credit history before accepting an application for a car loan. If an individual has a lower than average or bad credit score it classifies them as a risk for borrowing which will result in limited opportunities for lending. However, even if your credit score is low, you can still meet some lenders' standards for a car loan in Australia

When it comes to applying for a loan it can be difficult to pinpoint the minimum credit score requirement from bigger lenders. This is because lenders have varying standards and criteria when assessing a car loan application. In this way, there is no minimum requirement needed for a car loan in Australia but they do play a part in influencing the application process, and in turn, the loan options available.

Lenders tend to be cautious when accepting applications to alleviate risk. A higher credit score usually correlates to an individual's credit history, with the average credit score being 500-700. A higher credit score correlates to an individual's healthy finances and repayment history. Scores above 700 will usually benefit from the best rates available and may qualify for additional benefits. Respectively, those who have a credit score under 625 may be penalised with higher interest rates and more expensive deals.

Once you know your credit score, you can assess if it is healthy or poor by using a credit bureau benchmark as a reference.

  • Credit score below 625: It can be extremely difficult for individuals in this bracket to qualify for a car loan with a big bank or lending institution. People in this bracket are considered high risk which usually results in higher interest rates and alternative lending options like captive financing or online lending.

  • Credit score from 625 to 699: Individuals with this credit score are generally considered risky to accept for a car loan. This means that lenders outweigh the risk by offering higher interest rates and larger deposits. Additional requirements may be needed for a lender to accept an application at this level

  • Credit score from 700 to 799: Car loans are quite easy to secure with this credit score as the loan amount is usually quite low in comparison to a house or larger investment.

  • Credit score from 800 to 899: Credit scores in this range are usually considered to be quite healthy and lenders would feel quite comfortable lending to individuals with this score.

  • Credit score from 900 to 1,000: As the highest category of credit score, individuals in this bracket are considered to be very creditworthy and reliable with their loan and repayments. The benefits of this credit score range may include lower interest rates and initial deposits.

With these scores in mind, car loan eligibility does not necessarily correlate to a successful or unsuccessful application. Rather, having a lower credit score just means that options tend to be more limited and a higher credit score allows for more options and flexibility. To understand what category you may fall into, you can check your credit score at any time.

A good credit score is very important when you are looking for a car loan. With a high credit score, you have a higher chance of getting your car loan approved. On the other hand, a low credit score can make it incredibly challenging for you to get approved for car loans.

Your credit score is also important because it can determine other factors of your car loan, including:

  • The rate of interest: A higher credit score means the lenders see you as a low risk candidate as you are more likely to repay the loan back on time. As a result, you will be offered a low interest rate. But with a low credit score, you may get stuck with a high interest rate

  • The loan amount: With a high credit score, you prove to the lenders that you have a good repayment history and creditworthiness and that's why, you are more likely to be approved for a large car loan amount. But with a low score, you may not be able to get a loan for the full desired loan amount.

A good credit score also gives you access to special offers like low processing fees, zero download, and more.

In short, yes. Having a bad credit record and low credit score does not automatically result in your inability to apply and successfully receive a loan from providers. There are a range of factors that lenders will use to determine if you qualify for a car loan with credit score being just one of these factors.

However, having a lower credit score does make approval much more difficult and access to lower interest rates, lower deposits and other benefits may not be available to you. It is dependent on the lender and how their loans operate.

In Australia, there are two main types of car loans, they are secured and unsecured loans.

Secured car loans require a borrower to offer collateral that the lending provider can sell or confiscate if repayments are not met. Unsecured loans do not require the same collateral from the borrower with almost anyone being able to apply for them.

In both situations, a potential applicant still needs to provide their credit history in the loan application process. However, there are some strategies that you can consider to improve your chances of acceptance in either secure or unsecure methods.

  • Improving your credit score: It can be difficult to change an already low credit score but by practicing healthy financial habits like paying off any debts or saving regularly you will demonstrate sensible financial habits for lenders. Boosting your credit score will also give you more opportunities to choose favourable loans and repayment options.

  • Ask for a cosigner: By asking someone close to you like a relative, friend or partner to apply for a loan with you it will make both parties equally responsible. However, ensure that your chosen individual also has a good credit score as missed repayments could result in credit consequences for both of you.

  • Go to a lender that will give you the best deal: Assessing a lender's eligibility and assessment criteria before making an application will give you an idea of what lenders would be willing to let you borrow from them. Consider contacting lenders to make initial enquiries before lodging a full application.

  • Choose cheaper options: If you are having trouble getting a loan for a car that is more expensive than others it may be time to reconsider your choice of car. Finding a less expensive vehicle will reduce the loan amount and therefore the risk to the lender which is a more attractive option for a provider.

  • Provide supporting documentation: Other factors can impact an application beyond just a credit score. You can provide bank statements, pay slips, previous car repayments and other documents that can be supplied as evidence for your favourable financial circumstances. Be careful not to miss any relevant information as lenders could see this as misleading.

Beyond having secured and unsecured options for car loans, there are other types of car loans that are available for individuals with bad credit.

  • Secured car loans: Lenders offering this type of loan will take collateral, such as the car being purchased with the loan, and repossess the collateral if repayments are not made to reimburse the money that was owed.

  • Unsecured car loans: These loans do not take collateral but usually require consistent repayments. However, because of the risk of lending to an individual under these circumstances the interest rates are quite high.

  • Payday loans: If you are applying for a small loan over a short period of time, this may be the option for you. The length of repayment will range from 16 days to a year but with a higher interest rate.

  • Bad credit lenders: Specialist lenders will sometimes work solely with individuals with a lower credit score to help them purchase a car. These lenders will take the risk associated with bad credit scores but also charge a higher interest rate with numerous fees.

  • Second-chance car loans: If you have already tried to apply for a loan and have been rejected this may be the option for you. This is a type of loan that gives individuals with a poor credit score an opportunity to take out a loan via credit unions or reputable lenders. These loans always have a higher interest rate and fees.

Unfortunately, many Australians carry a high risk of loan repayment meaning a high rate of car loan rejection. However, bad credit loan options like personalised car loans can greatly improve an individual's chances of having a successful loan application. It is important to research potential providers that can tailor personal loans to an individual's credit score like ClearScore’s personal loans to ensure better deals for specific credit score ratings.

Before applying for a car loan it is also important to become familiar with borrowing options and auto financing procedures. Knowing how each lender operates could save you more money and hassle in the long run and could result in an improved credit score or offer an improved rate.

  • Captive financing: This financing is through a manufacturer and kept in-house, meaning that the borrower is buying and directly finances the loan through the dealership. Captive lenders work well with individuals with lower credit scores and can be forgiving as they have an incentive as individuals will buy their car instead of other brands.

  • Dealer financing: This is arranged by a car dealer as they work with different lenders to give you several loan options to find the one with the best terms. These options are good for individuals with a subpar credit score as your credit history is shared amongst several lenders.

  • Bank or credit union: With these kinds of loans, you would have to apply with a banker and receive a pre approval which you take back to the dealership. These types of loans will be paid back directly to your bank or credit union on a monthly basis. This is a viable option for those who already have an existing relationship with a bank or credit union as they can overlook poor credit scores in favour of the existing relationship.

  • Online lenders: Online lending is becoming extremely popular as Buy Now, Pay Later options also rise in lending spaces. The process of applying for these loans is all digital and can usually be found by looking online for auto loans, just be wary of unfamiliar or new companies. Do your research to find a reputable and fair deal.

  • Buy here, pay here: This option has dealers that specialise in working with people with no or poor credit score and finance the purchase of the car themselves. However, there are many downsides to buy here, pay here options including high interest rates, expensive deposit requirements and limited selection of cars.

If you just aren’t getting car loan interest rates that work for you, it may be best to delay buying your new car and work on building your credit score first. Here are a few things you can do for that:

Lower your credit utilisation ratio: The idea is to keep your credit balance low as compared to the credit limit available to you. Ideally, you shouldn’t use more than 60-70% of the credit limit available. This will help show the lenders that you can manage your finances well and you aren’t overextending yourself.

Avoid applying for other credit products: When you are applying for a car loan, refrain from applying for other types of credit in the same span of time. Ideally, you should avoid applying for new credit products for the next 4-6 months.

Build payment history: For all your existing credit products, you should make sure to pay your bills on time and in full. Don’t miss any payments or it can affect your credit score even more. It’s also a good idea to setup automatic payments so you don’t forget.

If you have a low credit score and you are concerned about getting approved for your car loan application, you need to prepare yourself and focus on the other factors that can help you get the approval.

Here are some of the factors beyond credit score that can effectively help you get approved for your car loan.

Bigger down payment

To offset your low credit score, you can put down a considerably bigger down payment which will lower down your monthly payments and help you get a lower interest rate as well. Paying a big down payment also makes you appear as a less risky candidate even with a lowered credit score.

Show your financial stability

Even with a low credit score, you can show your potential loan lenders that you are less of a risk by sharing documents that can showcase your financial stability. You can bring documentation of your employment along with your proof of income to show that you are a reliable loan applicant.

Look for your own financing

While most car dealerships offer financing options of their own, you can also check with your bank and other loan providers to find better car loan rates and offers. Take your time while comparing the quotes from the top lenders and review their eligibility criteria.

Once you have finalised on the lender of your choice, you can apply for the loan and hope to get approved. Remember that every time you apply for a loan, it creates a hard inquiry in your credit report. So, you shouldn’t apply to too many lenders in a short span of time as that could lead to your credit score getting affected.

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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.