When you apply for car finance, the Lender or Dealership needs to be confident of two things: are you earning enough to afford repayments and how big is their risk when lending to you, based on your Credit History?
They may ask for evidence of the former but they’ll check with a Credit Agency for the latter.
But what does a Credit Agency do? What is your Credit Score? And how will it affect your chances of securing the car you want?
A Credit Agency like Experian (who you’ll have seen advertising on TV) compiles financial information on individuals and companies. They get this information from banks, lenders and creditors you’ve dealt with in your lifetime. Missed enough of your rent to earn a CCJ? A Credit Agency will know about it. Defaulted on a loan? A Credit Agency will be told.
Likewise, if you’re really good with your money and you’ve a history of paying back loans promptly, managing your rent and staying out of trouble, a Credit Agency will know this too.
They will then place this information into a report and a Credit Score that legally-allowed Lenders (typically banks, car dealerships and finance companies) can request, to judge whether you’re good with your money or not. You can also request to see this, of course.
It’s a good idea to do this before taking out any large loan.
Why? Because your Credit Score can have a huge impact on your likelihood of securing that loan. More importantly, your Credit Score can affect the cost of your loan.
This applies equally to Car Finance.
How Does It Work?
When you apply for finance to buy or lease a car, your lender or dealership will request a Credit Report from a Credit Agency. This will give them very basic information on your history with loans and credit. It will also include a number called your Credit Score.
The Lower your Credit Score, the better your Credit History and the better you seem to be at paying off loans. The Higher your score, the more risk you pose as a customer because you’ve not been as reliable in paying back loans in the past.
And that’s the crucial word: Risk.
Lending any amount of money is a matter of risk. The higher the amount being borrowed, the higher the risk.
Car Finance companies and Dealerships have to balance the risk of you defaulting on your loan with the hope that you’re going to pay it back in full.
If you default on your finance, it’s likely that they’ll take your car back and sell it on but the car will have depreciated in that time. Depending on how old or expensive the car is, they may make a loss when they do this. They certainly won’t be making any more money in interest payments and fees, which is how most finance companies earn a crust.
Car Finance companies and Car Dealerships are businesses and they exist to make money.
So they need to be confident that you’re going to be a reliable customer and if that reliability is in doubt they need to adjust for that.
What Can Happen If You Have a Poor Credit Score.
The first and most obvious thing that can happen is that your lender may just refuse to offer you finance on a new car and close the door.
This happens less often than you might imagine, however.
More likely, they’ll adjust the fees and interest they’ll charge you (the APR) so that they’re more likely to make a little money from the deal if you do happen to default.
This is usually done automatically using a computer algorithm that is far too complicated for us to set out here. The bottom line is, however, that the more risk you pose, the higher the APR they’ll place on your Car Finance and the more you’ll pay every month.
And your risk comes from your Credit Score.
So if you want the very best deal, it’s worth looking at your Score in advance and seeing if there’s any way to improve it. Credit agencies actually give advice on this, and there are lots of options available to do this.
So keep an eye on your Credit Score if you’re thinking about buying a car in the future: keeping that score low could net you a far better deal.
If you want to know anything more about your Car Finance options, or if you’re looking for your next vehicle, say hello to us over at ChooseMyCar.com.
Until next time, stay safe on the road.
