In a report published by VantageScore Solutions and the Consumer Federation of America, it was found that around 40% of American consumers don’t know that lenders and other financial institutions use credit scores to help assess an individual’s eligibility for credit lines and the interest rates they have to pay. This is alarming provided that a consumer’s credit score is one of the most important factors lenders and creditors consider during the loan and credit application processes.
Why are credit scores so important for loan applications? When you apply for a loan, lenders have to check your credit history and score in order to determine whether you are a creditworthy client or you carry a risk for their business. A consumer with a good credit background will be eligible for more loans at affordable rates, and a consumer with a bad credit background will have to pay more in interest rates and will likely have a harder time getting their application accepted. This applies to almost anyone who wants to get any type of loan, including those who want to get a car loan. If you plan to finance the car of your dream through an auto loan,should be one of your top priorities.
Know the Credit Score Ranges before You Shop for a Loan
It is important to know thefor your score to fall into before you shop around because the average rates you will have to pay on your loan are dependent on the credit score ranges. If your credit score is between 900 and 720, for example, then it’s within the excellent score range and you are in a great position to obtain loans at lower interest rates and with flexible repayment terms. However, if your credit score is below 500, it’s within the bad score range. This means that you might have a hard time getting a car loan, and if you do get a loan, you will have to pay more in interest than a consumer with an excellent credit score.
Know Your Score So You Can Plan Ahead
If you’ve checked your credit score and found that you’re not in a good position to obtain a car loan at the moment, don’t be discouraged. Instead, think of ways improve your credit habits. First, determine what you need to do to boost your credit score. If you have lots of late payments, for example, work on paying them off and work on making any future payments on time. If you’re always maxing out your credit limit, on the other hand, try harder to keep it low as possible. Taking these measures and other financially smart actions will help you increase your credit score so you can apply for a better loan in the future.
Do Your Rate Shopping within a Week or Two
Rate shopping is the process of applying for different loans to see what insurance rates you will get based on your credit score. This can be helpful when looking for a loan, but you need to keep in mind that when a lending company checks your credit history and score, it is considered conducting a hard inquiry, which can slightly bring your score down. If you do a lot of rate shopping and too many loan companies check your credit score, it can have a noticeable impact on your credit score. However, if you do all of your rate shopping within a one- or two-week timeframe, all credit inquiries during that time will be considered a single credit inquiry, so your credit score won’t be affected as much. Taking advantage of this will allow you to shop around for good interest rates without having to worry about damaging your credit score.
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