It's no secret that your credit score impacts many aspects of your life. It can determine whether you can get a new credit card, a mortgage, or even get approved for car financing.
If you're thinking about buying a new car, it's important to know your credit score, and how it can affect the terms of your car loan.
In this article, we'll explore what credit scores are, and how they will impact your ability to get car financing.
What is a credit score?
A credit score, or credit rating, is a number that reflects the risk you pose to lenders.
If you are applying to take out a car loan, your lender will look at your unique credit score to determine how likely you are to repay a loan. Lenders consider your credit history when deciding whether and how much money they're willing to lend to you and at what terms. If you have a ‘good credit score’, it means that lenders believe you are likely to repay the loan on time and in full.
If you have a ‘bad or low credit score’, it could mean that you've had trouble paying off previous loans or bills in full in the past. Lenders may hesitate to lend money to someone who has had problems with previous lenders because they don't know if this person will pay them back.
Your credit score is calculated based on the information in your credit report. It's a number usually between 0 and 1000 and it represents the likelihood that you will pay off debt as agreed (on time). The higher your score, the more likely you are to pay back your debts, so the less ‘risky’ you appear to lenders. The average credit score in Australia is 734 which is deemed ‘great’ and would give you access to obtain car finance at competitive rates.
Each bureau has a different system for credit ratings and because of this, your credit score might be slightly different for each of the three companies.
How does my credit score impact my interest rate?
Your credit score is an indicator of how likely you are to pay back the money that you borrow. When lenders see that you have a good or excellent credit score, they know they can trust you with their money. Your high credit score shows that you are reliable, and as such, lenders are more likely to give you a low-interest rate with subsequent lower monthly repayments available.
If your credit score is poor (or low), then it's possible that the lender will charge you a higher interest rate on your loan amount to cover the risk they're taking on by lending money to someone who doesn't have as much financial stability. If you fall into this bracket there are bad credit lenders that specialise in providing finance to lower credit score customers so car loan eligibility is still very much attainable.
How can credit scores impact car financing?
Credit scores are important when it comes to financing a car. Your credit score ultimately decides whether your car loan application is approved, the conditions, as well as the interest rate you will receive.
Here's how it works: If you have good credit (a credit score of above 625), lenders will be more likely to offer you better interest rates and terms on your loan. If you have bad credit (below 550), lenders will be less likely to offer you favourable deals and may charge higher interest rates or fees on top of those already included in their loans.
What credit score is needed to buy a car in Australia?
There is no fixed minimum credit score for car loans in Australia. However, your credit score is important to lenders who use it to determine the risk of providing a loan to you. If your score is lower than what they require, they might charge you a higher rate of interest or reject your application altogether.
As a rule, your credit score ranking can be broken down into categories:
Excellent: 800 - 1,000
Very good: 700 - 799
Good: 625 - 699
Fair: 550 - 624
Below average: 300 - 549
Poor credit score: 0 - 299
These rankings are based on the Equifax credit score, which is the score used by most Driva lenders, but these rankings vary by provider.
Can I get a car loan with a credit score under 600?
A credit score of under 600 is considered below average to fair (depending upon the number), while a credit score between 550-624 is considered adequate to most lenders. A score between 300-549 may impact the number of lenders that would be willing to provide you with a car loan. You may find that the lenders place more conditions on the car loan, such as requiring you to have a larger deposit or giving you a higher interest rate.
Can I get a car loan with a 300 credit score?
Every lender has a minimum credit score requirement. While the cut-off for each lender is not publicly available, the minimum credit score to get a loan through the Driva platform is 300. But we may be able to assist if your credit score is lower than this depending on your unique circumstances. Our platform has the credit policies for each lender built-in, so we can help ensure we’re giving you more accurate pricing based on your specific credit score without even making a formal enquiry on your file.
With the Driva platform, you can check your eligibility for car loans for free without impacting your credit score.
What happens if I apply for a car loan with bad credit?
If you're applying for a car loan with bad credit, you're probably wondering what happens next. As mentioned earlier, once you’ve lodged a loan application your application will be on your credit file permanently and can affect your credit score.
Essentially there are three outcomes that might happen:
1. You might be denied because of your credit history and score.
2. You might be approved for a loan but with a high-interest rate.
3. You might be approved for a loan at an interest rate that makes sense for your budget—in which case… well, congratulations!
Your credit score has a lot to do with your ability to obtain car financing and how much interest you pay. It can make a huge difference in the long run and that’s why at Diva we are here to help you find the best car loan that suits your own unique financial situation.
If you want to see how your credit score translates to car loan rates, let our smart platform do the work for you.