When you apply for an auto loan, lenders will perform a credit check on you. Your credit affects whether or not you’ll be approved for the loan and the interest rate of the loan. The interest rate and terms of the loan have a major impact on how much you will end up paying overall, so it’s important that you know where your credit stands before you apply for an auto loan. When you apply, lenders will look at the following components of your credit file.
Before they approve you for a loan, lenders want to be sure that you have a history of making payments in full and on time. This is a reflection on whether or not you’ll make your auto loan payments on time. If you have a history of late payments, it may be more difficult for you to get a loan.
Status of Accounts
Your credit report also lists the status of each of your open accounts. If one or more of your accounts is late or in default, it can signal to a lender that you may be experiencing financial hardship and won’t be able to make timely payments on a new line of credit.
Many people don’t realize that the amount of credit they use on a monthly basis has a significant impact on their credit. Not only should you avoid maxing out your credit, you should strive to only use 30 percent of your credit limit. This means that if your credit limit is $1,000, you shouldn’t spend more than $300 each month. Credit utilization is an indicator of how responsible you are with your credit.
Lenders will also look at any new accounts you’ve opened. Multiple new lines of credit may be a red flag to a lender. It’s also worth noting that each time a lender pulls your credit, it’s considered a hard inquiry, which temporarily lowers your credit score.
Length of Credit History
Lenders will also look at the length of your credit history. If you don’t have a well established credit history, it may make it more difficult for you to get approved for a loan, or you may be approved at a higher interest rate.
How to Check Your Credit Report
Determine how your credit stacks up by checking your report regularly. When you’re familiar with what’s on your credit report, you’ll have a better idea of what to expect when you apply for an auto loan.
You can request a free credit report from each of the three credit bureaus - TransUnion, Experian, and Equifax - every 12 months. Get a sample request letter and mail it to one of the bureaus.
Before you sign on a loan, shop around to find the best terms and interest rate. Certain lenders may offer lower interest rates, which can mean paying less in the long run.