You do not need to bother about your credit score status if you are paying for your car outright. Still, if you are looking to finance it, whether from a car dealer or a private lender, your credit report will be perused by your lender to decide whether or not to sign off on your loan application.
You cannot deny the significance of having a good credit score to qualify for a car loan, but there is no minimum credit score that you will need to get the nod for a car loan. Regardless of the loan you are applying for, the lending decision is not just made on the basis of your credit score. A lot of factors are out there that play a paramount role in arriving at a decision.
What are the other factors that lenders use as criteria?
Lenders consider a variety of factors, and your credit score is one of them to determine the risk involved in lending to you. When your overall condition implies hidden risks of defaults or missed payments, your lender will refuse you a loan even if your credit report is good. Here are the factors taken into account to determine your borrowing potential.
- Your credit history
Your credit history reflects your past payment behaviour and a lender will use it to prognosticate your future behaviour. A positive history of making payments on time will show you an advantage. Perceiving you as a responsible borrower, they will be keen on lending to you.
However, bear in mind that your positive payment history does allow for an interpretation that your credit score will also be good. Payment history just accounts for 30% of your credit points. It is likely that you do not seem to be doing well in other aspects, such as high credit utilisation ratio, lower income and the like.
- Your incomings and outgoings
Lenders will always thoroughly check how much money you are making and how much is going out. Since you will be tied to a car debt for a couple of years, you will have to bear additional expenses of its instalment. It is vital for a lender to check whether your budget has room to cover this additional payment every month without any need to compromise your monthly expenses.
At the time of planning for a car loan, you should always make allowances for unforeseen expenses as well. You should be able to fall back on a sinking fund in case of emergencies. When you owe a car loan, it might not be easy for you to get the nod for small money loans in Ireland, and if you manage to get approval, interest rates will be higher. This will unnecessarily put a burden on your pocket. You will see long-term impacts on your finances. If you are not left with enough money, now is not the ideal time to apply for a car loan.
- Debt-to-income ratio
Your debt-to-income ratio is paramount for your lender to check to find out whether you will be able to manage payments of car money loans in Ireland. This percentage reflects the amount of debt you owe against your income. The higher ratio will make it a labyrinth for you to get the green light for these loans. A rule of thumb says that you should maintain it as low as 30%.
- Credit utilisation ratio
Your credit utilisation ratio indicates how much of your available credit you have used. How you use your credit card balances plays a crucial role in keeping it as low as possible. If you have used half of the available balance, the ratio is 50%. It will lower your overall credit points. Try to keep it as low as 25%.
How are interest rates influenced as your credit score changes?
The higher the credit score, the lower the interest rates and vice-versa. Interest rates will vary by lender, so research is always suggested before jumping the gun. The following table reflects approximate interest rates:
| Credit score | Best available interest rates |
| Excellent | 6.5%-7.5% |
| Good | 9.2%-10% |
| Fair | 13.9%-15.7% |
| Bad | 18.1%-21.5% |
| Very bad | 25.9%-29.4% |
The actual interest rates may be different because they will be determined after a thorough check of your credit report and income.
Tips to do up your credit file before applying for a car loan
You do not need to put your back into improving your credit score. All you need to do is understand what can have a bad impact on your credit points and how to stop them from taking a toll on your credit rating.
- Reduce your revolving debt. Bring your credit utilisation ratio down to 25%.
- Pay all your bills on time including rent.
- Consider the full settlement of your existing debts before applying for a loan.
- Make sure information on your credit report is accurate.
How can you improve your chances if your credit rating is not fair?
If you have a bad credit score and do not have time to improve it before applying for a car loan, you should consider the following tips:
- Know what you can afford. Since high-interest rates will increase your payment size, you should seek a smaller loan.
- Do the market research to choose a lender offering competitive interest rates to subprime borrowers.
- Try to increase your down payment size. If you make it up to 20 or 30%, your lender will likely offer the most affordable deal as it lowers their risks.
- Consider a co-signer or guarantor with a good credit history. Having a co-borrower like your spouse or another family member with a good credit score can also help you avail yourself of lower interest rates.
The bottom line
There is no bare minimum credit score that you must have to qualify for a car loan. Each lender uses multiple factors to check your affordability, and they have their own criteria. Therefore, even if your credit rating is poor, you are likely to get approval for a car loan.
