To get an auto loan with a good interest rate and manageable monthly payments that fit your budget, you’ll need a decent credit score. That begs the question, what is a good credit score for buying a car? Generally, you’ll need a FICO credit score that’s 500 or higher, but to get better terms and a better interest rate, you’ll want a credit score that’s higher than 660. This article will explain credit scores and what to do when purchasing a car with bad credit. We’ll also touch on how to improve your credit score and other helpful information on financing your auto loan.
Written by Attorney Eric Hansen.
Updated October 8, 2021
Alright, it’s time. You’ve ridden the bus or taken the train for the last time. You’ve done the research, compared new and used cars, and saved up for a down payment. You’re ready to buy a new car. But you’ll need financing. To get an auto loan with a good interest rate and manageable monthly payments that fit your budget, you’ll need a decent credit score. That begs the question, what is a good credit score for buying a car?
Generally, you’ll need a FICO credit score that’s 500 or higher, but to get better terms and a better interest rate, you’ll want a credit score that’s higher than 660. This article will explain credit scores and what to do when purchasing a car with bad credit. We’ll also touch on how to improve your credit score and other helpful information on financing your auto loan.
Credit Scores and How They Are Categorized
If you’re like most people, you’ll need to get a loan to purchase a new or used car. The average price of a new car is over $40,000. Given that, to keep your personal finances in good standing, you’ll need an auto loan with a low interest rate and reasonable monthly payment.
Car loan lenders — including banks, credit unions, car dealerships, and most major auto financing companies — will review your credit report and credit score to determine whether or not to give you a loan. Most lenders will want to see a good credit score, above 660, on credit applications for car loans.
The two most common credit-scoring models are FICO and VantageScore. They typically range from a low of 300 to a high of 850. Here’s how the categories breakdown:
An excellent credit score is 800-850.
A very good credit score is 740-799.
A good credit score is 670-739.
A fair credit score is 580-669.
A poor credit score is 300-579.
FICO Auto Score
For car financing, many lenders and car dealerships use the FICO Auto Score, which is an industry-specific credit score for auto lenders. The FICO Auto Score uses a different formula than the typical FICO score. It weighs certain factors differently. In particular, your credit utilization rate weighs more heavily in the Auto Score model than in a traditional FICO credit score. Your credit utilization rate indicates how much of your current revolving credit (like your credit cards) you’re using. On the other hand, occasional, isolated late payments matter less in the FICO Auto Score model than in the traditional model.
As with most financing, your credit score is a major factor in determining whether you get a car loan and what the terms are. This includes how much you’ll end up paying for financing based on the interest rate.
How Your Credit Score Affects Your Interest Rate
Lenders like banks or auto financing companies use your income, credit score, and other factors to rate you as a credit applicant. Ideally, you’ll want to be a prime or super-prime credit candidate. This means you have a FICO credit score of 661 or higher. Those borrowers get lower interest rates than borrowers that are nonprime, subprime, or deep subprime. They also routinely get approved for a higher loan amount.
Here’s how these categories break down by FICO credit score:
Super prime: 781-850
Nonprime borrowers: 601-660
Subprime borrowers: 501-600
Interest Rates and Risk
These ratings help creditors understand how risky you are as a borrower. It gives them a sense of how likely you are to pay back the loan. Having a super-prime rating means you’ll qualify for the best terms and lowest loan interest rates because you are less of a financial risk to the lender. By contrast, deep subprime borrowers are riskier for lenders. Their credit scores have suffered because of negative items on their credit report like missed payments, repossessions, and bankruptcies. This indicates to the lender that the borrower might struggle to repay the loan. As a result, subprime borrowers get higher interest rates.
While these ratings can vary from lender to lender, as a rule of thumb, you can expect a pretty good interest rate on an auto loan if you have a credit score greater than 660. Your credit score and credit rating strongly influence the loan terms a lender will offer you for a used or new car. But they’re not the only factors. Auto lenders will also look at your income, your debt-to-income ratio, the state of the automotive finance market, and the overall economic climate.
According to data from Experian, one of the three major credit reporting bureaus, here are the average annual percentage rates (APRs) for borrowers in each category:
|New Car Loan||Used Car Loan|
How To Improve Your Credit Score To Get a Lower Interest Rate
If your credit score isn’t as high as you’d like it to be, you can take steps to improve it. If you have a low credit score, consider postponing your car purchase until you’ve increased your score. Catching a ride or using mass transit to get to work for a little bit longer while you work on some credit repair may pay off in the long run.
To increase your score, it helps to know how credit scores are calculated. With time and determination, you can repair your credit and shore up your finances. To improve your credit for car financing, focus especially on decreasing your credit utilization ratio. You can do this by paying down your credit cards and other revolving credit accounts.
You can boost your score in other ways too. You may want to consider self-reporting your accounts to the credit reporting agencies. Additionally, make sure you have a good credit mix and a variety of different lines of credit. A credit builder loan could be a helpful tool in improving and increasing your credit mix while showing a good payment history.
The higher you get your credit score, the better your odds of qualifying for lower-interest financing, so keep at it and keep working to improve your credit score.
Buying a Car With Bad Credit
Generally, you’ll need a minimum credit score of 500 to qualify for an auto loan. Though there are exceptions to this. It’s possible to get financing from alternate sources like a buy here, pay here dealership or other private lenders. But these loans usually have high interest rates.
You can still qualify for a car loan with a low credit score or a bad credit score, but you’ll end up paying a lot more for the car than someone with a good credit score. Your interest rate will be significantly higher and you may have to come up with a large down payment. The lender may require a cosigner or you may want to get a cosigner to improve your odds of qualifying for the car loan.
Given that you’re financing your vehicle, the lender will likely require full auto coverage to protect their investment. Depending on your state insurance laws, having a low credit score can cause you to pay even higher car insurance premiums on top of already having to pay for full coverage.
Prepare Before Purchasing
Do thorough research on both cars and your financing options before making a purchase. Know your budget and your financing options and do your car shopping with those factors in mind.
You should also review your credit report and your FICO credit score. Dispute any inaccurate negative marks on your credit reports with the proper credit bureaus, creditors, and collection agencies to have them removed. Be prepared to explain any accurate negative entries in your credit file to your lender. Lenders may be willing to work with you if you suffered a hardship like a job loss, illness, or death in the family that caused you to miss payments or have late payments. This is especially true if you can show you’ve taken steps to correct the issue and you’re able to make on-time payments and meet your current financial obligations.
Where To Get Financing
While you can accept the financing terms and the interest rate on a car loan from the dealership, you don’t have to. It pays to shop around and look at multiple options for auto financing. Getting a car loan approved by a bank or credit union before going into a dealership can help you negotiate more favorable terms and a lower interest rate with a dealer.
If one lender denies your loan application, don’t be discouraged. Keep looking around and applying with other lenders. They might approve you for a car loan and offer better terms and a lower interest rate than you thought you could get. Keep track of your credit applications, though. Lenders will perform a hard inquiry on your credit report when you apply for financing. Having too many hard inquiries on your credit reports in a short time can hurt your score. Sometimes tabling your auto financing for a few months while you work on repairing your credit and improving your credit score can help you qualify for better auto financing options.
Your credit score plays an important role in getting a car loan. It may be the difference between getting approved for a loan or not. And it also helps determine your financing terms and interest rate. Generally, a score of 660 or higher will qualify you for a good interest rate on a car loan. With a FICO Auto Score of at least 500, you should be able to find financing, but you’ll also have a higher interest rate and may need to put down a higher down payment.
If you have bad credit and can put off your car purchase for a while, it’s a good idea to do so. Pausing your financing search, repairing your credit, and saving a little more could help you qualify for a better, less expensive car loan in the near future.