Whether you’re looking to buy your first car or upgrade to a family vehicle, securing a car loan depends on several factors, such as income, down payment, trade-in, pre-approval, and the vehicle’s price. However, all these factors are secondary compared to your credit score, which lenders use to assess eligibility.
However, establishing a healthy credit report can be difficult for many reasons, such as loss of income, business loss, and unnecessary/emergency expenses. Therefore, it’s much easier to hurt your score than improve it, especially if you’ve already taken a bad credit car loan. Financing a car is a significant investment no matter which makes or models you’re opting for, and delaying or defaulting on payments can severely impact your credit score and the loan you’ve already taken or planning to take.
Therefore, to help prevent this or minimize further damage, we’re sharing five factors that can impact your bad credit loan.
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5 Factors that Influence Your Bad Credit Car Loan in Australia
If you’re not careful, a loan rejection may be the least of your concerns. You could also have to pay higher interest, penalties, or have your vehicle repossessed by a lender. Therefore, you must consider the 5 factors below as each one can influence or harm your bad credit car loan in Australia.
Missed Or Late Payments
This one’s pretty obvious. Bad credit car loans often accompany large interest rates depending on where you’re shopping from, and the last thing you want is to add more fuel to the fire by not making consistent monthly payments. While one payment won’t kill your credit score, accumulating debt to due frequent missed or late payments will be penalized more severely. Moreover, many dealerships and lenders are going to be eying your recent payments or lack thereof, and being on their radar is a clear sign that you might be at credit risk and lose your car due to repossession at any time.
Closing a Credit Account
Many people in Australia think that closing an account can improve their credit score. However, this is far from correct and can harm your credit report, especially if you’re looking to secure a bad credit car loan. When you close a credit account, it falls off your credit report along with any positive credit information which could affect your loan application. Moreover, many lenders value applicants with accounts spanning years or decades and are willing to offer bad credit car loans based on longer credit history.
Exceeding Your Downpayment Limit
A car loan is meant for borrowing, meaning you should use the money wisely and avoid extravagant spending. This usually happens when car buyers exceed their budgets when the salesperson convinces them to buy more expensive options. As a consequence, they maximize their loan limits which affect their credit history and application. For instance, suppose your car budget is $10,000, and you plan to put down a 20% downpayment ($2,000). By opting for a $20,000 car instead, that $2,000 you planned to put down is now equivalent to 10%, which means you’ll be increasing your loan tenure and paying more in the long term.
Opening Multiple Accounts
Opening multiple accounts can be just as harmful as closing old accounts. When you’re getting approved by a dealership or lender, they will review your credit history and report. Multiple accounts often mean that applicants are flaky and unreliable due to, statistically speaking, of course. Shopping around for lines of credit often results in falling under high credit risk files, which ultimately increases the interest rate and lowers the term, especially for large purchases like vehicles.
Past Account Settlements
When borrowers and lenders agree to settle on a past-due account, the borrower usually agrees to a lower payment than the owed amount. In simple words, a $20,000 delinquent payment could turn into $15,000. Although this may look like a smart last resort, it doesn’t look good on your credit report, especially if you’re missing out on monthly car loan repayments. Therefore, you should try to convince the lender to remove the deficiency balance from the report so it doesn’t leave a negative stain that can affect a future home or car loan.
And there you have it – 5 factors that impact your bad credit car loan. Unfortunately, there are several other ways applicants and borrowers can ruin their applications, current/future loans, and credit. However, if you can avoid these major ones, many lenders and dealerships are willing to overlook minor fender benders.