Credit Score Only Fair? A 7-Year Loan Could Work for You

The new Volvo XC90

An interesting trend in automotive financing could affect your ability to buy a new car. To take advantage, you’re going to need fair (but not good) credit and be willing to stretch the duration of your loan up to 7 years.

As outlined in a recent Automotive News article, auto loans lasting 84 months or more are currently finding both advocates and opponents in the automotive-financing world. Lenders opposed to the longer loans feel consumers with fair credit are buying too much car and are therefore more likely to eventually default.

Turns out, according to Equifax data quoted in the article, these 7-year loans are the least likely to end in default among consumers in the 630-to-680 credit range, which is considered “fair” credit.

(Just a quick primer on credit scores: the 700-749 range is considered good, while anything above that is considered excellent. Your credit is in trouble once it starts to dip below 630.)

Your credit score plays an important role when you purchase a car, new or used. Experian, the nation’s largest credit bureau, says credit scores help determine 90 percent of all auto-financing decisions.

As Jerry Kronenberg points out in our How To Buy a Car with Bad Credit article, scores run from 300 to 850, and people with high scores pay much lower interest rates than those with low ones, because people with good scores are presumed to be less likely to default on their loans.

As mentioned above, though, it turns out the length of your loan will have an impact as well. Equifax said the current default rate among people with fair credit who have taken out loans of 84 months or longer is 1.56 percent. When condensed to 72 to 77 months, however, that same loan has the highest average delinquency rate, at 2.87 percent.

So there lies the sweet spot when buying a new car with fair credit. See if your lender will give you a longer loan when you apply for financing.

Odds are, as Kronenberg points out, the lower monthly payments for the longer loan will help you rebuild your credit score. He advises making the payments on time for a year or two to bump your credit score into the good category, after which you can refinance into a loan with lower interest.

Another thing to consider is the length of the warranty on the car you’re financing. Hyundai and Kia have 10-year, 100,000-mile powertrain warranties, while other companies, like Buick and Volvo, offer 4-year, 50,000-mile warranties instead.

You’re going to want a warranty that covers you for at least half the life of your loan (if not longer). This reduces your risk of high repair bills. Scheduling your preventive maintenance on a regular basis should also help keep your car running smoothly for the life of your loan.

Seven years (or 84 months) might sound like a long time to spend paying off a new car, but it could be just the right solution for improving your credit score and ultimately moving into shorter-term loans. Just resist the temptation to buy too much car—keep your payments a maximum of 15 to 20 percent of your take-home income.

-Keith Griffin

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