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For most of us, purchasing a house and a car are two major situations where borrowing money is essential. They are significant financial outlays that require dedicated effort to pay off over a long period of time. Banks and other lending institutions rely on our credit score for approval of loans, so what credit score is needed to buy a house or car?
Credit scores are the safeguard banks use to protect themselves against the possibility of loan defaults. They are based on a range of data related to the borrowers previous financial accountability and present financial status. Whether we like it or not, our credit score is a personalised risk assessment, and involves disclosure of both good and bad financial dealings. The positive and negative are taken into consideration for our individual credit score.
Banks are in competition with each other in obtaining custom, therefore their credit scoring system for loan approvals is secretive. Generally, the only people privy to the bank’s system are those working within their own risk division. For this reason, a home or car loan application that has been refused by one bank may be accepted by another bank.
Credit score components include:
- Defaults and overdue accounts
- Positive and negative credit history
- Arrears in credit
- Account activity related to credit cards, phone accounts and personal loans
- Employment and residence stability
A credit score in Australia of 800 or more is considered very good, and unless there are other circumstances negatively affecting the application, there is a good chance of loan approval.
Additional risk factors
Banks and lenders also use profiling to determine risk factors for home and car loan borrowers. Postcodes that are in lower socio-economic regions may be seen in a negative light. Risks related to occupation may also be considered: for example, those working in a single industry mining town if the future of the mine or ongoing employment is in jeopardy.
Another indicator that banks look for are net assets, especially determined by age and income. An example could be someone of middle-age who earns more than $100,000 per year but has little to show in assets of any kind. The bank or lender may believe bad money management is the cause, and therefore reject the loan application.
Employment stability might also be considered, with continual changes of employer or occupation a sign of unsteadiness.
Obtaining a car loan with bad credit
Not everyone has an unblemished credit history, and fortunately there are loan options available for people who have experienced difficulty.
Payday loans for a few thousand dollars can help people get back behind the wheel, even if it isn’t in your first car of choice. These loans incur a higher interest rate but can be stretched out to a year or more.
Bad credit lenders assist people with bad credit to purchase a car. They take a risk on behalf of the customer, and therefore higher rates and fees can be expected.
Hold on to your old car while waiting for your credit score to improve. Bad credit doesn’t remain on your report forever, and in the meantime you can improve your score by establishing good financial accountability.
Car loans come in differing formats and your credit score might be enough for approval of one of them. Types of car loans include:
- Secured car loan: The vehicle you purchase is used as security for the loan. Failure to make repayments can lead to the lender repossessing the car and selling it to offset losses.
- Unsecured car loan: The vehicle isn’t used as security and cannot be repossessed by the lender.
- Dealer finance: Your finance is obtained from the auto dealer instead of a financial lender. The dealer may include specific loan conditions.
- Unsecured personal loan: These loans aren’t car specific, and might include higher interest rates associated with the risk to the lender.
The first step in obtaining a loan is to find out your credit score. If possible, pay any outstanding bills or fees as soon as possible. This will indicate your determination to turn the financial corner and help to improve your credit score for future purchases. Once you know your credit score you can make enquiries with banks, financial advisors or lenders
Here’s a list of government supported credit reporting bodies (CRB):
List originally posted on www.oaic.gov.au