Cars are an expensive purchase that people finance when they cannot afford to pay the total cost all at once. Vehicle loans are secured by the car itself, since the lender can repossess it for nonpayment and sell it to offset the owed balance, but you still need a decent credit rating to qualify for financing.
Credit Requirements
You need a solid credit history and good credit score to finance your car purchase at a reasonable interest rate. You can still get credit to buy a vehicle with some past problems, but your lender will charge a higher interest rate. The Cars Direct automotive website advises that a credit score of 740 qualifies you for the best terms, and financing at higher rates is available with scores down through the high 600s. A high score requires a long string of on-time payments on all your existing accounts and low credit card balances.
Credit Assessment
Assess your credit before buying a car by reviewing your Experian, Equiax and TransUnion credit reports, the Lending Tree loan site advises. Banks, credit unions and finance companies use at least one, and sometimes all three, of these reports or check your credit score, which comes from the report data. Federal law entitles you to free reports through AnnualCreditReport.com annually. The reports let you see whether your credit is in good shape and whether your reports have errors that could make it hard to get financing. Dispute any mistakes through the credit bureaus, which have online forms for complaints, before seeking a car loan. You can also check your credit score, but the bureaus are allowed to charge you for it.
Credit Sources
Many dealerships have finance departments that search for loans when you purchase a car from them, but their rates are often higher than what you could find on your own because they make money from marking up the interest rate, according to Philip Reed of the Edmunds automotive website, For example, the dealer might find that your credit rating qualifies you for a loan at 5 percent, but the finance person tells you that you must pay 7 percent and keeps the rest as profit. Get preapproved through your credit union, bank or an online lender before car shopping to avoid this problem.
Alternative
You can get credit to buy a car with a co-signer if you do not qualify on your own, because lenders grant the financing on the strength of the other person's credit rating. Your co-signer must agree to be fully responsible for the bill if you ever default because that person is guaranteeing the debt. You ruin the other person's credit, as well as adding more negative entries to your own credit reports, if you stop paying for the car.
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