In promising news for prospective buyers with a shaky credit history, there’s no fixed minimum credit score for a car loan in Australia.
However, as lenders refer to your credit score to determine the risk of providing a loan to you, a lower score might make them wary of lending to you. Consequently, they might charge you a higher rate of interest to reduce their risk, or, in some cases, reject your application altogether. So, if you’re considering financing for your car, your credit score is an important number to understand and track.
What is a credit score?
A credit rating is a number representing your reputation as a borrower. It’s calculated based on your financial history, which is listed in your credit report. Credit scores are used by lenders to gauge how likely you’re to repay a loan in the future. Basically, your credit score reflects how good or bad you are at handling your finances.
How does my credit score impact my interest rate?
Depending on your credit score, a lender will decide whether and how much money they’re willing to lend to you and at what terms. Typically, the higher your credit score, the more creditworthy you’re considered by lenders, making you eligible for a wider variety of financing options at more competitive rates.
It’s usually a good idea to check your credit score with any of the four credit bureaus before applying for any type of credit.
What is a good credit score to buy a car?
It’s difficult to pinpoint the credit score required for a particular type of loan because most banks and lenders do not disclose this information.
Nevertheless, each credit bureau has benchmarks that you can use as a reference to the likelihood of receiving an approval. Experian uses the following credit score benchmarks:
Excellent (800 to 1000) – You are considered as an extremely low risk to default on a loan. Getting a car loan approval is easy and you’ll get more loan options.
Very Good (700 to 799) – You are part of the top 40% creditworthy Australians. Most lenders will offer you a car loan.
Good (625 to 699) – You are in good standing and have a better chance of car loan approval with lower interest rates.
Average (550 to 624) – You belong among the 20% to 40% of Australian with negative items on their credit reports. Additional requirements are needed to be approved for a car loan.
Below Average (0 to 549) – You are determined as high risk and will have difficulty in getting a loan approval. Some lenders will consider lending you but with very high-interest rates.
What happens if I apply for a car loan with bad credit?
If you have a low credit score, you may find it hard to get a loan from a traditional lender. Alternatively, you may be offered a loan with a high interest rate. In such a situation, you may need to consider a loan from a specialist lender who’s more likely to approve your application for finance, but these loans often come with higher rates.
It’s worth remembering that not making your repayments on time can reduce your credit score further. Therefore, unless you require a car urgently, it might help to wait some time while working to repair your credit issues before filing an application for new credit. It’s also worth using an online repayment calculator to estimate your weekly, fortnightly or monthly repayments to realistically assess whether you can afford a car loan or not.
Where can you check your credit score?
Credit scores can be acquired from credit bureaus. They are the ones that collect, maintain, and issue credit history data. From this financial information, the credit bureaus will generate a credit report and credit score. Banks and lenders will request for your credit report and score every time you apply for a loan.
Australian Credit Bureaus
There are three different credit bureaus operating in Australia where you can get your credit score. Follow this link to the Office of the Australian Information Commissioner for information regarding accessing your credit report.
Once you receive your report it is a good idea to review your report for errors, check over every item to make sure there aren’t any mistakes, such as missed payments, duplicate debt listings, or even debt line items you didn’t apply for (due to fraud, for example).
What interest rate to expect with a low credit score?
The interest rate you’ll obtain on a car loan is inversely connected to your credit score. That means you should expect a lower interest rate from lenders if your credit score is higher. If you have a good credit score, lenders will most likely offer you the best possible interest rate.
On the other hand, if your credit score is ordinary, you should expect to pay an interest rate that is 2% to 3% higher than the lowest possible rate. Low credit scores should expect extremely high interest rates, which lenders would apply to compensate for the high risk of lending money to you.
A credit provider can list information about your repayment history on your credit report, including whether you have made payments on time or missed any payments.
The information appears on your credit report as a number (from 0 to 7) showing the age, in months, of your oldest missed payment. This information remains on your credit report for 2 years.
You are considered to have missed a payment if you make the payment more than 14 days after the due date.
A credit provider isn’t required to send you a written notice before listing a missed payment on your credit report.
How to improve your credit score?
A credit score is not permanent and may still go up if you begin managing your financial health well.
If you have an average or below average credit score which is considered low, don’t worry. You can still improve it. There are several different ways for you to give your credit score a boost prior to applying for a car loan.
- Avoid making it worse – The first thing to do is to not make it worse. Avoid consecutive late payments, defaults, and court judgments. Also, avoid making excessive credit enquiries. All of these will lower your credit score.
- Make timely payments – Make your monthly loan and credit card repayments on time. If you miss a deadline, pay within the grace period and it will not be reported in arrears to credit bureaus.
- Apply for new credit accounts – Getting approved for personal loans or credit cards will give a positive impact on your credit score. But make sure not to send out applications in short intervals because it will have an opposite effect. Also, make sure to continue making timely repayments for all your new credits.
- Dispute Incorrect Credit Report Entries – It’s best to regularly check your credit report to make sure that all information is correct. If there are any incorrect details, send out a dispute letter to the credit bureau.
- Set up direct debit – for all bill payments automatically pay for all of your ongoing payments like electricity, gas, phone, internet and even your credit card monthly payment, set the cards minimum withdrawal fee to be paid automatically every month.
- Reduce current credit limits – It seems to reason that the more money you can put on a credit card, the larger the risk you’ll be considered when applying for car financing. As a result, lowering your credit card limits may help you improve your credit score.
- Remember that credit checks affect your score – Each time you apply for a product like a credit card, a loan, or even a post-paid mobile phone plan, you’re lowering your credit score. So, before you apply for another credit card, consider whether the risk is worth it.
- Consolidate your debt – If you have a bunch of different loans from a bunch of different lenders (with interest rates all over the shop to boot), bring them all together into one easy-to-manage single monthly repayment from one lender. Not only will this simplify your life, but it may even save you a good deal of money in the process and give you a better chance of getting a car loan.
- Your credit score will improve gradually as your defaults get older. This doesn’t speed up when you repay a defaulted debt, but some lenders are only likely to lend to you once defaults have been paid. And starting to repay debts makes a CCJ much less likely, which would make your credit record worse.
A credit provider can list a default on your credit report if:
The payment has been overdue for at least 60 days and the overdue payment is equal to or more than $150.
A notice has been sent to your last known address to let you know about the overdue payment and requesting payment.
A second notice was sent at least 30 days later to let you know that if you don’t make a payment the credit provider intends to disclose the information to a credit reporting body.
The credit provider must wait at least 14 days after issuing the second notice before listing the default
A credit provider can’t wait more than 3 months after issuing you with the second notice to list the default.
A credit provider is considered to have complied with the notice requirements if they can show that it was sent to your last known address. They may email the notices if that’s the usual way they write to you.
If a credit provider mistakenly sent the notices to an old address that was not your last known address, then the default listing may not be valid. However, if they sent the notices to an old address because you failed to update your contact details then the credit provider is likely to have met the notice requirements.
If you paid the overdue amount after the credit provider listed the default, the listing remains on your credit report, but the credit provider will update it to show the payment was made.
Can a default be removed from a credit report?
Like most negative information, a default on an account may remain on the credit report for seven years from the original default date and affect your scores the entire time. The original default date is the date the account first became late, and after which was never brought current.
If a default is paid, the status will be updated to ‘paid’ however it cannot be removed. You can only have a default removed if it was listed in error.
Can I get a car loan with a credit default?
Issues like failing to make payments on time can reflect poorly on your ability to service a loan and future credit assessment. As a result, defaults are likely to have a significant impact on the chance of getting your car loan approved. On most occasions, banks and financiers will ask for the defaults to be settled before considering lending to you.
If you have an unpaid default noted on your credit file. You will need to provide strong documentation and evidence to dispute what is recorded in your credit report. Some leniencies may be given if the size of the default is quite small like a telco non-payment.
Build a Good Credit Score
Now that you know all about credit scores, it’s time to build an excellent credit standing to help your chances of a quick and easy loan approval. Not only will it help you finance your new vehicle but will also give you the lowest interest rate available. Whatever your situation, we are here to help.
DISCLAIMER: The information contained in this document is general in nature and should not be relied upon as legal advice. Berra finance does not warrant the accuracy or completeness of any representations made in the document or that the material is suitable for any purpose. You are responsible for assessing the material and seeking your own legal or financial advice. To the fullest extent permitted by law, Berra finance excludes all liability for loss or damage (including indirect or consequential loss or damage) which may be incurred in connection with your use of or reliance on the material contained in this document.