Does your credit score affect your car loan application?

If you’re getting ready to apply for a car loan, you may be wondering how much of an impact your credit score could have on the success of your application.

As with any financial product, it’s important to get your ducks in a row before beginning the application process. Doing so can help to strengthen your application and your chances of being approved for your preferred loan.

This can include ensuring any required documentation is complete and correct, confirming that you meet the eligibility criteria for the car loan you are applying for, and checking your credit score and file.

In fact, not only can your credit score impact whether you’re approved for a car loan, but also the interest rate you may be offered.

The reason for this is that your credit score and the contents of your credit file provide lenders with information that allows them to determine the level of risk you pose as a borrower.

For example, if you have an average to poor credit score with a default recorded on your file and multiple recent applications for credit, the lender assessing your application may take this as an indication that you haven’t been a responsible borrower in the past. The lender may determine that you present a high level of risk in terms of repaying the amount you’ve applied to borrow.

Depending on a range of other factors, the lender may decide to either decline your car loan application or approve it but with a higher interest rate to balance out the risk they would be taking on.

Some lenders will only approve applications for very good to excellent credit borrowers, which is why it’s important to check the lending criteria before applying.

How can I improve my credit score?

Borrowers with excellent credit scores will typically have the most success in applying for a car loan and will generally be offered the most competitive interest rates.

For this reason, if your credit score is less than ideal, it may be worth working towards boosting it before you apply for a car loan. Here are some practical ways you could do this:

1. Make a habit out of checking your credit history

Regularly checking your credit score is a great start, but don’t forget to routinely request a copy of your credit history from the major reporting bureaus – Experian and Equifax. This will allow you to ensure it is accurate, and to dispute any discrepancies you may find that could be negatively affecting your credit score. According to Moneysmart.gov.au, you have a right to request a free copy of your credit file every three months.

2. Limit the amount of credit applications you submit

Each time you apply for finance, the lender will run a credit check which is recorded on your file. If you have recently applied for one or several other credit products and then proceed to apply for a car loan, the car loan provider may see the other applications for credit on your file and have concerns that you may be overborrowing or are desperate for funds.

To avoid this, it may be worth holding off on applying for a new credit card or similar if you have plans to apply for a substantial finance product like a car loan.

3. Prioritise paying down existing debts in a timely manner

If you have outstanding debts, focusing on paying them down and consistently meeting due dates can have a positive impact on your credit score and strengthen your credit history. It will allow lenders to see that you understand the importance of repaying your debts and are reliable when it comes to making payments on time.

If you have a habit of forgetting to pay your bills before the due date rolls around, consider setting up a direct deposit or setting a reminder in your calendar so that it’s one less thing you have to rely on your memory for.

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