Credit Scores & Debt to Income Ratio for Car Loans

 When applying for a car loan at Frontier Bank, several factors influence the interest rate. These include your credit score, debt-to-income ratio for a car loan, and the loan amount determined by the Loan to Value (LTV).

This blog will show you how your credit score impacts your financial well-being and interest rate. The interest rate will then impact your monthly payments. It will also affect the total interest paid throughout the loan.

A credit score is a number that reflects the information on your credit report, ranging from 300 to 850. A score of 800 or higher is excellent, and scores above 700 are strong. About 63% of borrowers have a credit score of 700 or higher.

The credit report is a record of your credit history, including information about whether bills are paid on time and how much is owed to creditors. The credit score can change depending on changes in credit history.

The credit score affects whether a loan can be obtained and the cost of that loan. For example, Janice applies for a $25,000 car loan to purchase a two-year-old vehicle for $35,000 and trades in a vehicle worth $10,000. With a 805 credit score and a debt-to-income ratio under 28%, Janice qualifies for a 60-month loan at 7.00%.

Using a Car Loan Calculator, her monthly payment would be $525.52, and the total interest paid over the loan's life would be $4,991.49.

Another customer, Tom, applies for a $25,000 loan to purchase a vehicle for $35,000 with a $10,000 trade-in. Tom's credit report shows some negative activity, including late payments and large balances on credit cards.

With a 670 credit score, Tom qualifies for a 60-month loan at an 8.50% interest rate. His monthly payment would be $544.51, and the total interest paid over the loan's life would be $6,130.50.

Tom ends up paying $1,122.01 more in interest than Janice. Additionally, Tom will likely pay more for auto insurance due to his lower credit score.

Tom's lower credit score results in a higher interest rate, higher monthly payment, and more total interest paid on his car loan compared to Janice. This illustrates the significant impact of a credit score on loan costs. Now, you may be asking, "How do I get a loan with a high debt-to-income ratio?"

To maintain a good credit score, you must make all payments on time. Set reminders on your phone to ensure timely loan payments. Keep the ratio of debt to available credit limit on revolving accounts below 30%.

Regularly monitor your credit report by obtaining copies from all three credit bureaus.

Maintaining a strong credit score helps secure the best rates and terms on loans, making it an essential aspect of financial health. Give Frontier Bank a call and take the next step towards improving your credit score.

David Lantz
Senior VP