How Does a Late Payment Affect Car Financing?

Most couples must apply for a loan to purchase a new car. However, if your credit report shows that you have paid bills late in the past, lenders may be hesitant to approve your application. Though a single late payment on your credit report won't necessarily prevent you from qualifying for car financing, it may affect the interest rate on your loan.

TL;DR (Too Long; Didn't Read)

When you make your car payments late, your credit is negatively affected. You may have more difficulty securing car financing in the future, as you will be deemed more of a risk.

About Credit Reports

Lenders use the information on your credit report to determine whether you are likely to default on a loan. Your credit report includes a list of your debts and open credit accounts, information about your payment history, any monetary judgments filed against you and a list of recent inquiries made by creditors.

Lenders also examine your credit score, which is a measure of your risk as a borrower that credit bureaus calculate using a mathematical formula. Certain credit activity, such as reducing your overall debt load, raises your credit score. Other activity, such as late payments, lowers your score.

Late Payments

Your payment history is one of the major components of your credit score, responsible for approximately 35 percent of the value. Late payments can lower your score dramatically. According to Equifax, a single late payment can lower a credit score by as much as 110 points. The severity of a late payment's effect depends on the current value of the score, how late the payment is and whether you have made late payments in the past.

Car Financing Implications

If a late payment causes you to fall below the lender's minimum credit score requirement, it might deny your application for a car loan. If you can still qualify for the loan, a lower credit score may raise the interest rate on the loan or prevent you from qualifying for any promotional interest rates the dealer is offering for new car purchases at the time.

Even if the late payment hasn't lowered your credit score much, a loan officer may still think twice before approving your loan or offering you the best interest rate when he sees the negative information on your credit report.

Other Considerations

Late payments remain on your credit report for two years, but accounts in collections remain for seven years and are more harmful to your credit score. If you have missed a payment, make it as soon as you remember. If late payments appear on your credit report, talk about them with your lender. If you can provide an explanation for the entry, the lender may be less likely to hold it against you.

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