How Your Credit Score Affects Applying For a Loan
During your lifetime, you most likely will need to apply for a loan. That loan may finance a new home purchase, an automobile, or college tuition. Walking into a lender's office without knowing how your credit score affects loan rates and your qualification options is a grave mistake.
Let's look at what your credit score means to potential loan rates for buying a home or a car or financing a college education.
Loan Rates and Your Credit Score
From home mortgages to automobile loans, each financing option has a common factor: a loan rate. These loan rates dictate how much interest you will pay over the lifetime of the loan.
There are various determinants that figure into a loan rate, but one of the most important factors is your credit score. Before even determining your loan rate, most lenders use your credit score to decide whether to consider you as a qualified loan candidate. Once you are approved for financing, your credit score is again used to select an appropriate rate.
For some loans, a lower credit score may increase your percentage rate and for others, such as an automobile loan, a low score may even require you to place a down payment.
Possibility of a Co-signer
Sometimes, your credit score will get you approved for a loan, but may result in a higher loan rate. In these financing situations, your lender may allow you to get a co-signer to change (preferably for the better) the rate of your loan.
A co-signer is someone who would sign the loan with you and allow the loan to become part of his or her credit history. The most common types of co-signers include parents for some of those first large purchases such as a vehicle or even a first credit card.
Samples of Loans Rates
Depending on your credit score, loan rates will vary. For some more common types of loans a higher loan rate could add a significant amount of interest and an increase in monthly payments. For instance, on a $300,000 30-year mortgage, you may see these types of loan rates:
- A score of 760-850 could earn you a 5.780% rate
- A score of 700-759 could earn you a 6.002% rate
- A score of 600-699 could earn you a 6.286% rate
Using the mortgage scenario above, the difference between the lowest loan rate and the highest rate is almost $100 per month and over $34,000 during the lifetime of the loan.
For auto loans in June of 2011, an average 60-month rate started at 5.43%, which could go up or down depending on your credit score.
When it comes to buying a home or a vehicle or to applying for a student loan, you need to understand how your credit score impacts loan rates. By knowing some of the ranges of rates available, you minimize any surprises when it comes to your loan rate.
If you're looking for more information on how your credit report affects loan rates, look at other resources in our credit library.
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