Lender's Criteria and Your Credit Score When Buying a Used Car

There are many factors to consider when shopping for a used car. Not only is the condition and history of the car important, but a person's credit rating also affects the bottom line.

Determining Credit Scores:

According to an article on CarJunky.com, "Car Shopping: Knowing Your Credit Score Can Help Put You In the Driver's Seat", for a buyer it is important to walk into the dealership knowing their credit score and the interest rate they are likely to receive. One of the driving factors in determining loan interest rates is a three-digit number ranging from 300 to 850 - a person's FICO credit score.

A Score Watch tool allows any person to view their FICO credit score. MyFICO.com and Equifax.com are two websites that sell the Score Watch tool to calculate and watch credit scores.

According to Equifax, the average interest rates for each FICO Score as of 10/2/06 are:

FICO Score 720-850 - Avg. Rate: 7.224%

690-719 - 7.959%

660-689 - 9.533%

620-659 - 11.151%

590-619 - 14.566%

500-589 - 15.294%

A Score Watch tool allows a buyer to be able to track their FICO score over time and set a target score for earning the best interest rate on an auto loan.

Credit Scores Determine the Type of Lender:

Lenders frequently use the FICO credit score as a benchmark to estimate the risk in the loan.

A credit score determines the types of lenders that a car dealership uses - either Prime or Sub-Prime.

A dealership seeks a "prime" or "traditional" lender for a person with a good score and credit history. The buyer pays less interest with a prime lender.

A dealership seeks a "sub-prime" or "secondary" lender for a person with a poor credit score, recent bankruptcy, and/or short history with current employer. Sub-prime lenders weigh credit scores differently. For example, a credit score can rise if a lender gives more weight to a mortgage payment or previous car payments.

Sub-prime lenders have to consider more since it is a high-risk loan. Specifically, sub-prime lenders:

oconsider if the car is new or used. Sub-prime lenders prefer a vehicle no more than 2-3 years old. An older car has a greater risk of needing repairs, which a person cannot afford, thus he or she would stop paying for the car.

olook for good payment history on installment debt payments.

oevaluate the warranty from the manufacturer.

oconsider whether the brand that has a good history of being a reliable car.

Research Particular Financial Situation Prior to Purchasing the Used Car:

A buyer should approach a used car-financing plan as they would any loan process. Researching and organizing finances before going into the purchasing process is a good start. A buyer should also assume responsibility of the car purchasing process by tapping into the same information that lenders use to determine qualification for a loan.

A low credit score now can change over time. A person may be able to purchase that used car with a Prime lender and pay less interest when your financial situation improves. Remember to keep the bottom-line cost in mind when shopping at a dealership or online.

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