New and used car prices are on the rise, loan terms are growing longer, and most of us are still financing our vehicles. According to Experian, 85% of new passenger vehicle purchases and 55.5% of used vehicle purchases were financed in the first quarter of 2019.
To determine if you qualify for a loan on a new or used vehicle, lenders will look at your credit score.
So if lenders are looking at your score to determine if you qualify for a loan on a new or used car, there must be a magic minimum number they all want to see, right? Wrong.
What Credit Score Is Needed to Buy a Car?
There is no predetermined minimum credit score to buy a car. There isn’t even a single score lenders use.
Different lenders — including banks and credit unions, auto finance companies and sometimes private car dealerships — may look at different versions of your scores, but typically, they will use your traditional FICO scores or your VantageScore. Both of these employ a range of 300 to 850, but be aware that less common credit scores might use slightly different ranges.
Some lenders may instead use your FICO Auto Score, which has a wider range of 250 to 900, and uses data from your credit reports to predict your risk of defaulting specifically on an auto loan.
So there’s no easy answer to the question of what credit score is needed to buy a car. All that said, the lower your credit score, the higher the likelihood that you will be denied. And if you have a low score and do qualify, your interest rate will likely be much higher, meaning you’ll pay more — potentially significantly more — over the course of the loan term.
What’s a Good Credit Score for a Car Loan?
According to Bankrate, borrowers who financed a new car at the end of last year had an average credit score of 718; used car borrowers’ scores averaged 659.
In general, if your score is in high 700s or even creeps into 800s territory (superprime), you’ll have no problem securing financing, and you can expect the best interest rates currently on offer. As of October 2019, that means somewhere in the 4% range. Even shoppers in the low 700s can expect guaranteed approval and decent interest rates.
But if your score is below 700, expect a little more difficulty. You certainly won’t be turned down if your score is 680, for example, but you may have to answer some tough questions from lenders and provide more documentation to show you’re capable of paying back a large sum of money.
Even if you’re in subprime (501 to 600) or deep subprime (300 to 500) territory, you might not necessarily be out of luck.
You just need to understand that you may pay a high interest rate, sometimes 20% or more, which means you could end up paying much more for the same vehicle sold at the same price than someone with a 780 credit score.
How much more? Let’s compare how much two borrowers — one with a 4% interest rate and one with a 20% interest rate — would pay for a five-year loan for $15,000 and a sales tax of 5.5%.
The buyer who finances at a 4% interest rate would pay $1,661 in interest; the buyer who finances at a 20% interest rate will pay a total of $9,331. That’s a difference of more than $7,500.
Because a subprime score indicates that you’ve had trouble borrowing in the past, make sure you are ready to handle your payments for the entire term of the loan. Otherwise, you risk defaulting on the loan and damaging your credit score and financial standing even more.
What Does the Average Car Loan Look Like?
How can you know if you’re getting a good deal? The numbers regularly change, so do your homework in advance.
As of October 2019, the average loan amount for a new car was $32,187 with a 6.16% interest rate over nearly 69 months and an average monthly payment of $554.
The average loan amount for a used car was $20,137 with a 10.06% interest rate over nearly 65 months and an average monthly payment of $391.
According to Experian, these numbers are up over previous years, and with new car costs continuing to rise, it looks like the trend will continue.
Don’t just stick with the first loan offer you get, regardless of your credit score. Shop around with different financial institutions, or verify that the dealership has done so on your behalf. The extra legwork on your end could earn you a better interest rate.
Even if it’s only half a percentage point lower, that’s more money in your pocket each month over a lengthy car loan.
How Can I Improve My Credit Score?
If you have a subprime or deep subprime credit score and can afford to hold off on purchasing a vehicle until you’ve improved your score, you should do so. Spending one year to get your credit score back to more stable ground could make the difference between a 5% and a 15% interest rate.
So how can you improve your credit score? While it is easier said than done, you can:
Pay Your Bills on Time, Every Month
Lenders like to see consistent on-time payments on your credit scores and loans. In fact, payment history is the most important credit factor.
Lower Your Credit Usage
Try to pay your credit card bills in full (no minimum payments) and on time. If you must carry a balance, try to keep your credit utilization ratio as low as possible. It’s usually recommended that you use no more than 30% of your overall credit. For a credit card with a $10,000 limit, that means you never let your balance go above $3,000.
You don’t need to wait until the end of the billing cycle to make credit card payments. Paying off your credit card once a week is a great habit to get into.
Don’t Open a New Line of Credit
Avoid opening new credit before applying for an auto loan. We recommend six steady months with no requests for a new line of credit — and no credit limit increase requests either.
How to Get a Car Loan With Bad Credit
If your current situation doesn’t afford you the luxury of waiting to buy a car, there are a few things you can do when you have a low credit score:
- Get a co-signer with good credit, which will reduce your interest rate.
- Shop for a more affordable economy car, and consider purchasing used instead of new.
- Shop around for car loans; don’t sign until you feel comfortable with your option.
Timothy Moore leads a team of editors and graphic designers at a market research company as his full-time gig. As a freelance writer, he writes about personal finance, careers, education, pet care, travel and the automotive industry. His work has been featured on Debt.com, The Ladders, Glassdoor and The News Wheel.