Having a good credit score is one of the most important aspects of purchasing a car. While there’s no set minimum in order to buy a vehicle, a score on the lower end could raise how much you’ll have to pay and could make you jump through a few extra hoops.
You Will Have the Best Luck If Your Credit Score is At Least 600
In order to qualify for a traditional car loan, you’ll likely need a credit score of at least 600, but that can vary by lender. If your credit score falls below that, you may need to consider a subprime loan, asking someone to co-sign your loan application or buying a used car with cash.
There is No Set Minimum Credit Score to Buy a Car
Credit scores are usually grouped into categories based on number ranges. While there’s no minimum score requirement per se, the higher your score, the better borrower you are in the eyes of lenders. Experian, one of the three credit bureaus, breaks up auto loan credit score ranges like this:
- Super prime (excellent credit): 781-850
- Prime: 661-780
- Near prime (also sometimes called non-prime): 601-660
- Subprime (501-600)
- Deep subprime (300-500)
Nearly 54% of used car loans are issued to prime borrowers, who have good credit, or super-prime borrowers, who have near-perfect credit, demonstrating how important it is to have good credit. Those borrowers will get a better interest rate. While those with a lower credit score can still receive a car loan, their auto loan rates will be much higher. In particular, subprime borrowers will often pay more than three times the interest rate that a super-prime borrower pays.
Used Car Loan: Average Loan Rate by Risk
- Super Prime 3.66%
- Prime 5.49%
- Near prime 10.49%
- Subprime 17.11%
- Deep subprime 20.58%
New Car Loan: Average Loan Rate by Risk
- Super Prime 2.34%
- Prime 3.48%
- Near prime 6.61%
- Subprime 11.03%
- Deep subprime 14.59%
Adding it All Up
For example, three borrowers took out a loan for the same new vehicle at $37,000 over 48 months. The prime borrower qualifies for a rate of 3.48%, the near-prime borrower qualifies for a rate of 6.61%, and the deep subprime borrower has a rate of 14.59%.
The prime borrower will make a monthly payment of $826.84, paying a total of $2,688.46 in interest. The near-prime borrower’s monthly payment would be $879.33, paying $5,207.92 in total interest. While the deep subprime borrower’s monthly payment would be $1,022.06, with that borrower paying a whopping $12,059.09 in interest across the length of the loan.
In this scenario, the deep subprime borrower will pay $9370.63 more in interest than the prime borrower for the exact same vehicle. This is another example of why having a good credit score can help you out in the long run with better financing options. If this deep subprime borrower could bump up their score to at least subprime (not to mention near-prime or higher), they could save thousands of dollars.
Buying a car with less-than-perfect credit can be challenging. Here are a few extra tips:
Why Does My Credit Score Affect My Car Loan?
Your credit score determines your creditworthiness to lenders and those you are trying to buy something from. When applying for a car loan, your credit score helps determine if you’ll qualify for certain loans and interest rates. Borrowers with higher tier scores like prime and super-prime will get the best rates.
According to Experian, the average credit score for new and used vehicles is climbing, with the average score being 732 in the second quarter of 2021. The average score for a used car loan was 665 in that same time frame. With the rise of higher scores, it’s more important than ever to work on your own score if you want to get fair loan terms.
Different lenders may use a variety of scores when viewing your application so it’s best to practice smart borrowing habits no matter the type of loan you have.
Which Credit Scores Do Lenders Use?
Lenders can choose which credit scores they want to look at when evaluating a car loan application. Depending on the lender, they may use a different score or even a combination of several credit scores. This makes it hard to determine which scores the lender will see when they look over your application.
FICO Auto Score and VantageScore are the two main credit ratings used in the automotive finance market, with many similarities between the two. Both scoring systems will look at one of your credit reports from the three major credit bureaus —Experian, Equifax, or TransUnion. FICO specifically has a score for auto lenders ranging from 250 to 900. While these scores are created specifically for auto lenders, they are based on generic FICO scores but are slightly altered to predict the borrower’s likelihood of repaying a car loan. This makes your history with auto loans especially important. Lenders may also just look at the more traditional FICO Score 8 and 9 to gauge your creditworthiness.
VantageScore 3.0 and 4.0 are credit scoring models created in collaboration with Experian, Equifax, and TransUnion. Between the two scores, there are minor differences, as they all evaluate similar factors, including on-time payments, number of accounts, and credit utilization.
To check your credit score, visit annualcreditreport.com for an official, free version of your rating. Credit card issuers and Experian also offer options to view your credit score for free.
The main factors that determine your credit score are:
- Payment history: This is mostly just to determine how many payments you’ve missed (if any) over a certain period.
- Credit utilization: This factor looks at what percentage of your credit line you used every month. Generally it’s good to use 30% or less.
- Age of accounts: If you have a lack of loan history, lenders may be apprehensive to trust you’ll pay back your loan. All you can do in that case is build healthy, multi-year accounts to boost your credit standing.
- Account mix: This is just looking at which types of loans you have — credit cards, mortgages, car loans. Some diversity can be considered a benefit, as long as you have on-time payments with each.
- Inquiries: These are checks on your credit score, which typically only happen when taking out loans for things like a car or house. Hard inquiries will slightly decrease your score while soft checks (like your visiting Annual Credit Report) won’t affect it.
How Can I Boost My Chances of Approval?
There are many ways to improve the chances of getting approved for a car. Depending on which category you fall into, follow these tips:
If You Need to Buy Now
- If at all possible, try to secure your financing before you start to shop (credit unions are a good place to start).
- Be willing to pay a higher interest rate.
- Get a family member to help you out by acting as a co-signer on your loan application, especially if they have a better credit score than you.
- Expand your shopping search. Try to look for individual sellers in your area instead of dealerships. Prices are usually more favorable. If you try to buy from an individual, run the VIN through CarFax. This can give details on the vehicle’s accident history, prior ownership, mileage and other details. See if the car is still covered by a warranty. If not, ask if you can have a mechanic look over the car before you buy. And always take a friend if you’re going to a stranger’s house, or ask to meet the seller in a public place so you can check out the car — which also shows that it’s drivable.
- You can also visit a dealer who specializes in bad credit: Some companies will loan to you and use the vehicle as collateral. Bear in mind that if you default on payments, the car will be repossessed, with no way to regain the substantial downpayment you had to provide.
If You Have Some Time Before You Need to Buy
If you aren’t in the market for a new car immediately, now is the time to get your finances and credit in order. Consider:
- Working on your credit scores: Making on time payments is the best way to boost your credit rating.
- Establishing a budget: Creating a set budget for purchases on groceries and entertainment can help you save up for that new car.
- Continue to pay down existing debt: Not only will this help your credit score, but it will decrease the impact of your future car loan.
- Don’t apply for new credit: Applying for new credit could bring your credit score down, so avoid doing so until after you’ve purchased the vehicle.
- Don’t exceed your credit limit: Avoid doing so to maintain or increase your credit score. Generally aim to use 30% or less of your credit limit if possible.
Know Your Budget
One of the biggest things you can do in preparation for buying a car is to determine your price range. Find out what you can afford, what interest rates you will get, and how much you have to pay for a down payment, if at all. Remember, a car costs more than just the initial purchase. Keep in mind gas and regular maintenance payments when factoring in your budget.
Identify the vehicles that fit your price range in addition to other factors (vehicle make, seating, gas mileage). Check out cars on Carvana, Cars.com, Auto Trader, and other sites to find the right car for you. You can also visit Consumer Reports for car ratings. Don’t forget to also factor in other loan payments, like any student loans or medical bills you may have.
Don’t buy more car than you can afford. Edmunds recommends that your used car payment be no more than 10% of your take-home income. That means if you’re bringing home $3,000 per month, your loan payment should not exceed $300. While you may be able to afford to go a bit higher if your housing costs are lower than average, don’t set yourself up to fail by committing to a larger loan amount than your budget allows.
Narrow down your list and keep it handy when you apply for your loan as many lenders want to know what kind of vehicle you plan to buy. To shop for loans, check with credit unions, banks and online for car loans. Credit unions in particular have a multitude of benefits. They usually have lower interest rates, fewer loan requirements and will be more willing to work with you if you have a poor credit score. Credit unions typically require a small fee to join, sometimes as little as $5, and you usually can get a same-day loan.
If you set up a meeting in person to get a loan make sure you bring:
- Your driver’s license
- Recent pay stub
- Utility or credit card bill
- Your estimated budget
- Your vehicle shopping list
This will ensure that you can get the process completed all at once.
Don’t Forget Other Expenses
When you budget for a monthly car payment, you’ll also need to keep in mind what kind of gasoline mileage the new vehicle gets, and whether your car insurance premiums will increase. Some insurers charge more for coverage if you have bad credit, though this is illegal in some states. The main thing to remember is that a lot goes into purchasing a car, and you should only commit to it once you’ve evaluated all the factors.
The Bottom Line
Buying a vehicle is no simple feat. In the current market, even purchasing a used vehicle can come with a hefty price tag. For customers with a less than stellar credit score, buying a car can cost you thousands of extra dollars simply due to the interest rate and terms you qualify for. If possible, do what you can to boost your score before getting an auto loan. While there is no set limit that prohibits you from getting a car loan with a low credit score, lenders may offer unfavorable terms when you come to the table.
It depends on the interest rate you’re currently paying compared to the current refinancing rates. If your credit score has improved significantly and you qualify for a significantly lower rate, it could be a good time to refinance. Be careful about extending your loan term, however, because an extended term could mean paying more over the long run than if you don’t refinance.
Before your loan application is approved, the lender will pull your credit report to assess your creditworthiness. This helps them determine the risk involved in issuing you a loan (they don’t want to have to deal with repossession if you stop making payments) and the interest rate they will charge you.
Experts say you should aim to spend no more than 10% of your monthly take-home pay. Edmunds offers a good calculator to figure out the total amount you can realistically afford to pay for a car.