What Credit Score Is Needed to Buy a Car?

Congratulations! If you’re reading this article, it means you’re preparing to buy a car. In this case, you’re probably wondering:

What credit score is needed to buy a car?

A higher credit score is more likely to secure you a car loan with lower interest. And while a poor credit score isn’t ideal, it won’t necessarily prevent you from qualifying for a car loan. Never underestimate how much dealers want to sell you a car.

But let’s talk in numbers!

Minimum Credit Score to Buy a Car

According to 2020 Experian data, your credit score for a car loan should be at around 660 for an interest rate of 6% or lower.

You’re also bound to wonder:

What credit score is needed to buy a new car?

The average credit score required for a new-car loan is 721. Yet, almost 30% of car loans were granted to applicants with scores below 600.

What credit score is needed to buy a used car?

The cited data also found that typically, the credit score required for a used-car loan is 657. But almost 4.5% of used car loans were granted to applicants with scores below 500.

Here are a few more car loan statistics that you can check out.

So, What Is a Good Credit Score to Buy a Car?

Before we further discuss what credit score is needed to buy a car, let’s clarify the definition of credit score.

A credit score is a statistical analysis that gauges a consumer’s creditworthiness. It ranges from 300 to 850. A good score is generally classified as prime, ranging from 661-780, while the best credit score is classified as superprime and falls into the 781-850 bracket.

If you’re among the 21% of Americans with an exceptional credit score, there isn’t much to worry about. A higher score makes you more appealing to auto lenders, thus making it easier to obtain favorable terms for the credit needed to buy a car.

While there may be slight differences in the information collected by the three national credit bureaus (Equifax, Experian and TransUnion), these are the five main factors that determine your score:

  • Payment history: This counts for 35% of your credit score and demonstrates your long-term ability to pay your bills on time.
  • Total amount owed: This makes up for 30% of your score and refers to your debt amount and the percentage of available credit you use. Both are known as credit utilization.
  • Credit history length: This contributes 15% to your score, and auto lenders see longer credit history as less risky because there is more data to determine your creditworthiness.
  • Types of credit: Also known as credit mix, this builds 10% of your score. It depicts your fixed installment credit (like car loans and mortgage) and revolving credit (such as credit cards) combination.
  • New credit: This also accounts for 10% of your score. It refers to how many new accounts you have and have applied for recently (which resulted in credit inquiries), as well as when was the latest one opened.

Now that we’ve covered the credit score basics, let’s discuss the advantages of a good credit score:

  • Lenders use credit scores to determine the probability that you will make the stipulated repayments on time. The higher your score, the more confidence auto lenders will have in you as a borrower.
  • A higher score means you can borrow a higher loan amount because it demonstrates that you’ve been paying back your previous loans on time.
  • Your score directly affects how much interest you’ll pay. The higher your score, the lower your interest rate will be. This means a good score can save you thousands of dollars in your lifetime.

For example, on a $20,000 five-year loan, a prime borrower can expect to make a monthly payment of approximately $387 — resulting in a total repayment of $23,220. Interest paid would only be $3,220.

On the other hand, a buyer with bad credit can expect to repay around $505 a month for the same loan — resulting in a total repayment of $30,300. Interest paid would be $10,300.

  • Your score may determine the size of your minimum down payment. Often, it’s applicants with low scores who have to make hefty down payments
  • A good credit score can help you negotiate lower auto insurance premiums.

The bottom line: A good credit score makes your financial and personal goals much easier to achieve, as many lenders will be more cooperative in granting you the most favorable loan terms.

Average Car Loan Interest Rate by Credit Score

Before you walk into a car dealership, you may want to get familiar with the average APR for a car loan and know your credit standing.

You can check your current borrower profile by getting a credit report from one of the three national credit reporting agencies. You’re entitled to one free copy every 12 months.

Alternatively, you can use myFICO, the official consumer division of the Fair Isaac Corporation (FICO). Apart from producing the most widely used consumer credit score, the data analytics company offers specific credit scoring services. At a certain price (starting at 19.95 a month), you can subscribe for access to information, including your FICO auto score. This specialized score is based on industry-specific risk behavior. Many lenders analyze such information to approve your application and present you with a final loan offer.

So what are the average auto loan rates by credit score?

According to the Experian data, an applicant scoring just above 700 can anticipate an approximate interest rate of 6.05% on a used-car loan, compared to 17.78% or more for an applicant scoring in the mid 500s.

Auto Loan Rates Based On Credit Scores

Credit Score Average Annual Percentage Rate (APR), New Car Average Annual Percentage Rate (APR), Used Car
Deep Subprime Credit: 300-500 14.39% 20.45%
Subprime Credit: 501-600 11.92% 17.74%
Nonprime Credit: 601-660 7.65% 11.26%
Prime Credit: 661-780 4.68% 6.04%
Superprime Credit: 781-850 3.65 % 4.29%

Source: Experian State Of The Automotive Finance Market (Q1 2020 report)

How to Buy a Car with Bad Credit

Securing an auto loan with bad credit isn’t impossible, but it may take some time and planning. According to the Experian, the following tips will help ensure your bad credit doesn’t hinder your loan application:

  • Identify the factors that hurt your credit score, then remove them by settling late payments and clearing any credit report errors. This adds positive information to your credit profile.
  • Avoid additional credit obligations. This will help you steer clear of red flags such as late payments, debt collections, and bankruptcy.
  • Research the current interest rates online to set your expectations right. This can also help you estimate the average automobile costs and the monthly repayments.
  • Make a bigger down payment. This reduces your borrowing amount, interest rate and monthly repayment bills.
  • Stick to what you can afford. Avoid expensive vehicles with exorbitant rates, and rather choose an option that will allow for more disposable income each month.
  • Seek preapproval. If the lender only performs a soft credit pull to check your loan eligibility, this won’t hurt your credit score.
  • You can secure a loan via “buy-here, pay-here” lenders, but they often do not submit your payments to credit bureaus. This means such loans can generate higher interest rates, and they won’t help you build your credit.
  • Read your paperwork thoroughly and understand your loan terms. Always take your time, so you don’t fall prey to scams or predatory lending companies. Sign everything before you drive out of the car dealership so that unscrupulous salesmen can’t make any changes to the terms before calling you back to sign.
  • Understand how dealership financing systems work. Dealers generally reach out to multiple auto lenders to get quotes. Ask to view each quote instead of just the one the dealer suggests.
  • Consider getting a cosigner. When you apply for a car loan with bad credit, a cosigner can help secure more favorable terms with lower interest rates. The new debt will appear on both yours and your cosigner’s credit profiles, so any default you commit will impact both your scores. There are also auto lenders that specialize in helping people buy a car with bad credit. So explore all options available.

It’s important to note that all lenders perform a hard credit check at some point in the loan approval process. Yet you can reduce the credit score damage by using one of the alternatives to no-credit-check auto loans. These platforms run only a soft pull to help you secure a preapproval and even compare offers.

The bottom line: Buying a car with bad credit isn’t impossible. A low score means less favorable interest rates and/or that you may need a cosigner, but it doesn’t mean you won’t secure a car loan.

How to Get Approved for a Car Loan

Auto lenders consider multiple criteria to decide on your loan application. Having a steady source of income improves your probability of making your repayments on time, thus your chances of getting a loan. It’s also crucial to provide all details required, such as proof of identity and address.

You may also need to build your credit first before you go shopping. These tips can help stack the odds in your favor.

  • Pay your bills on time. Payments that extend 30 days after the due date can damage your score, so pay at least the minimum on time.
  • Keep credit card balances low in comparison to your credit limits. Your credit utilization influences your credit score, so lowering your credit utilization will increase your score and demonstrate your discipline to auto lenders.
  • Apply for a credit increase if you have credit card accounts. If your payment track record is in good standing, you’re likely to be granted a credit limit increase. But it’s crucial not to spend this amount to maintain a lower credit utilization ratio.
  • Avoid seeking alternative sources of credit within six months of applying for a car loan. Applicants’ credit scores decrease when applying for a new loan or any additional debt, so it may be best to delay this until you achieve a good credit score to buy a car.
  • Keep your credit accounts active unless there’s a valid reason to close them. Closing your cards decreases your credit limit, which negatively impacts your credit utilization ratio.
  • Pay all outstanding credit card balances. Your score is influenced by your credit utilization ratio — the amount of credit you use compared to your credit limit. To calculate your credit utilization rate, divide your total credit card balances by your total credit limits.
  • Aim for the lowest possible credit utilization rate. For a good credit score, maintain a utilization rate that’s under 30%. And if you strive for an optimal score, you should keep it under 10%.
  • Consolidate your current debt. If you’re struggling to pay your credit card balances, you can apply for a debt consolidation loan which frees up money to pay. Furthermore, lenders also tend to charge less interest on personal loans than on credit cards, which means that debt consolidation can save you more money and help build your credit score to buy a car.
  • Verify that your credit reports have no errors. The three national bureaus have free credit report websites that can verify your information. Ensure that your credit report has no errors that could lower your score, and file a dispute if you detect any. The bureaus will examine your claim, and depending on the outcome, they’ll either validate, update or delete the information in question. Credit repair companies can provide further assistance, as they also offer credit report monitoring and use credit repair software.
  • Enroll in Experian Boost. This program enables you to share utility and phone payment information, which is then factored into your FICO auto score based on data from Experian. This has boosted scores for many individuals, which is advantageous when applying for a car loan.

When ready, you can apply online with auto lenders such as myAutoloan. Your subsequent car loan approval can further build your credit in two important ways: payment history and credit mix. Remember, payment history is the largest contributor to your credit score.

If you still end up with a higher-rate loan than you’d anticipated, continue to monitor your score closely. You might be able to refinance your car loan at a lower rate after you have documented timeous payments for six to 12 months.

Key Takeaways

You now know what credit score is needed to buy a car and what factors influence it.

Here’s a quick recap:

  • Your credit score is one of the most important measures of your creditworthiness. It shows lenders how financially responsible you are.
  • The higher your credit score, the higher your borrowing capacity, and the lower your interest rate would be.
  • A low credit score doesn’t mean you cannot secure a car loan. It simply means higher interest and insurance rates and possibly a need for a cosigner.
  • With time and planning, you can build your credit before car shopping.

FAQ

Can you buy a car with a credit card?

Yes, you can, although an auto loan is still the best way if you can’t afford the cash price. Interest rates are generally much higher when buying cars with credit cards — they can exceed 20%. Credit card loans also have shorter repayment terms than auto loans, making monthly installments much higher.

What is a good APR for a car loan?

Try to aim for an APR that’s no higher than 12%. But bear in mind that the rate depends on your credit score and the specific lender.

Can I get a car loan with a 600 credit score?

Yes, you can. The minimum credit score for a car loan depends on the specific lender. But 2020 Experian data shows nearly 30% of car loans were granted to applicants with scores below 600.

What do you need to buy a car?

You need your best possible credit score to finance a car. You also need to provide proof of income, identity and address. If your credit score is subprime or deep subprime, you may also need a cosigner.

What credit score is needed to buy a car without a cosigner?

Typically, a credit score of 660 should help you secure an independent loan.

How can you get preapproved for a car loan?

Know your borrower profile, what credit score is needed to buy a car, and build it beforehand if necessary. Also, provide proof of all your regular payments, and justify any late or missed payments. Ideally, you should get preapproved by a bank or credit union before applying via a dealership. This has two main benefits:

  • A pre-approved offer helps you look more organized and establishes that you’ll have a loan that covers the price of the vehicle you want.
  • Dealers won’t have to request hard credit inquiries. This keeps your score from dropping, which occurs when multiple dealers request hard credit inquiries within 14-45 days.

ABOUT AUTHOR

To be honest, I never wanted to become a writer. My dream job was a software developer/engineer or a graphic designer. But, as I’m far more skillful with words than maths, I got a degree in English language and literature. Now that I’ve been a content creator for six years, I’d never think about any other profession. I write as if my life depended on it. But don’t think writing is all I know of. When I get tired of it (yeah, it’s possible), I do yoga or play the guitar. When inspiration strikes me, I grab my camera and go out for a photo shoot. Although I prefer the nice weather, I could freeze to death for just a few good snaps.

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