What’s the minimum credit score needed for a car loan?
Your credit score is always important when applying for new loans, but there is no minimum score to be approved when it comes to buying a car. A higher score may increase your chances of getting a loan with lower rates and more favorable terms, but it is still possible to get an auto loan with a lower score.
Buying a car is a big financial step, and knowing your credit score can help you enter the buying process on a solid footing. A 2022 report shows that the average credit score of car financiers is slightly higher than last year. The report also found:
- According to statistics, the average credit score for a used car loan or lease was 665, while the average score for a new car loan or lease was 732.
- The report shows that about 65% of car financing was for borrowers with a credit score of 661 or higher. Borrowers with scores between 501 and 600 accounted for about 33%, while financing for less than 2% went to people with a score of less than 500.
- Larger down payments, shopping around for financing, and bringing documents showing good payment history on other large purchases can help you meet bad credit.
- A low credit score will not prevent you from getting a car loan, but it can raise your interest rates, which can lead to higher payments.
Better credit means lower costs
Interest rates vary depending on your credit score, so knowing what to expect on average can help you with your car budget. With a target credit score of 661 or above, you should get a new car loan with approximately 3.64% or a better annual percentage rate, or a used car loan of approximately 5.35%.
|Credit score||Average APR, new car||Average APR used car|
|Deep subprime: 300-500.||12.53%.||19.87%.|
According to Experian data, a person with a low score in the 700s could see a rate of about 5.35% on used cars, compared to 17.11% for a buyer’s scorer in the mid-500s or It was more than that. Using a car loan calculator illustrates the difference that can be made.
For example, at $ 20,000, on a five-year used car loan with no down payment, it’s about $ 382 a month for a buyer with a lower credit score than for a buyer with a higher credit score of $ 498. A buyer with better credit will pay about $ 2,915 interest on the life of the loan, while a buyer with less credit will pay about $ 9,894. Also, in most states, bad credit can mean higher rates of car insurance.
The difference for new car loans is not so great: Lenders with low scores in the 1970s can expect an average rate of 3.64 for borrowers in the mid-500s, compared to 11.03%.
What credit scores do auto lenders use?
You don’t just have a credit score, you have many of them. Scoring models use the same basic information from your credit reports but weigh different factors differently. There are two major scoring models:
- FICO is the most famous and most used scoring company. FICO scores range from 300 to 850.
- VantageScore. A new FICO competitor. Although earlier versions of VantageScore were between 501 and 990, the latest VantageScore is between 300 and 850, as FICO does.
Larger scoring models can also provide more special scores for specific purposes. For example, FICO offers FICO Auto Score, an industry-specific credit score for auto lenders. FICO AutoScore uses a different weighing system than other FICO scores, which has a greater impact on the use of credit and isolates late payments such as less than a one-time error. To further complicate matters, there are several versions of the FICO AutoScore.
Many car dealerships rely on FICO auto scores, but not all do. If you are unsure and curious, ask your lender what scores they check before agreeing to a credit check.
Build your credit before buying a car:
If you are still not getting the car loan rates that work for you, it may be time to delay your car purchase and work on building your credit. It means:
- Pay bills on time. Payment after 30 days can ruin your score, so pay at least on time.
- Keep your credit card balance below your credit line. The extent to which you are using it is called your credit usage, and it has a big effect on your score. You can try many tricks to reduce your credit usage to increase your score.
- Avoid applying for a second credit within six months of applying for a car loan.
- Keep credit card accounts open unless there is a compelling reason to close them. Closing the cards lowers your total credit limit, which can hurt your credit usage.
How To Get A Car Loan With Bad Credit?
If you have bad credit and you don’t have time to wait for it to get better, getting a car loan is still possible. In fact, there are some lenders who work exclusively with people with low credit scores. Once you know your credit score, start talking to potential lenders to find out what options might be available to someone in your credit range.
In addition to shopping around for deals, be sure to manage other aspects of your application well so that you can compensate for the low credit score. Here are some ways you can prepare your car for bad credit:
- Find out what you can afford. Estimating how many cars you can afford will help you improve your search for cars with monthly payments. Investigate interest rates for people in your credit range, and estimate the monthly payments you can afford. Doing so can get you to the same page as potential lenders, and speed you up the process of finding the best financing option.
- Determine your down payment. A large down payment can help reduce your monthly payments, lower interest rates, and shorten your loan term. A large down payment reduces the amount you have to take, which makes lenders view the loan as a low risk, which can help in case your credit goes bad.
- Consider adding a cosigner to the list. A cosigner with good credit can help improve your chances of getting approved for a car loan and help you lock in at a lower rate. Cosigners are people who agree to apply for an auto loan with you, promising lenders that if you do not meet your car payments, they will. If you have bad credit, a cosigner can help limit the lender’s risk and encourage you to approve the loan.