What Credit Score Do You Need to Buy a Car?
Harrison Pierce is a writer and a digital nomad, specializing in personal finance with a focus on credit cards. He is a graduate of the University of North Carolina at Chapel Hill with a major in sociology and is currently traveling the world.Read full bio
At a Glance
Your credit score is a major factor in your ability to secure an auto loan and determines your associated interest rates.
Maintaining a good credit score can save you a substantial amount of money in the long run, so paying attention to your financial habits and making improvements when necessary is crucial. Remember, however, that lenders also consider your debt-to-income ratio, employment history, and down payment, so a lower credit score doesn’t automatically disqualify you from purchasing a car. Being aware of your credit standing and taking steps to improve it is the best way to make your dream car a reality.
In this article, you’ll learn:
How can you finance a car purchase?
You have a few different options. One popular choice is an auto loan, which is a type of loan specifically designed for buying a car. In this scenario, the car itself serves as collateral for the loan. Alternatively, a person could lease the vehicle, whereby the lender owns the car, and the borrower makes monthly payments to use it for a predetermined period. Another option is to take out a personal loan, which typically comes with higher interest rates than auto loans. You can also use credit cards for smaller purchases or down payments, but their high interest rates make them less than ideal for larger sums. For those with significant home equity, a home equity loan may be an attractive option for securing funds to purchase a car. Finally, dealer financing is another option provided by car dealerships through partnerships with lenders, often with promotional rates or incentives.
1. Personal loans
You can use a personal loan to finance a car purchase. However, there are some factors to consider before doing so. Personal loans typically have higher interest rates than car loans, so you may end up paying more in interest over the life of the loan if you use a personal loan to finance a car. Personal loans are typically unsecured, meaning they are not backed by collateral like a car loan. This means that if you default on the loan, the lender does not have a specific asset (i.e., the car) to repossess to recoup their losses, which can be attractive to many borrowers.
Using a personal loan to finance a car purchase can give you more flexibility and may allow you to purchase a car from a private seller, whereas some car loans may have restrictions on where you can buy the car.
Compare: Best Personal Loans to Buy a Car
2. Auto loans
To use an auto loan to finance a car purchase, you’ll want to do the following:
- Determine your budget: Consider your income, expenses, and other financial obligations to determine how much you can afford to spend on a car. Use this information to determine your budget for the car purchase.
- Shop for a car: Once you have a budget, start shopping for cars that fit your budget. Consider factors such as the make and model of the car, its age and condition, and its mileage.
- Research lenders: Research lenders who offer auto loans and compare their interest rates, terms, and fees. You may consider working with multiple lenders to compare loan offers and find the best deal.
- Apply for a loan: Once you have chosen a lender, apply. You will typically need to provide information such as your income, employment status, and credit score.
- Get pre-approved: You will receive a pre-approval letter or a loan commitment from the lender if approved for a loan. This will outline the loan terms, such as the interest rate and loan amount.
- Negotiate with the dealer: Take the pre-approval letter or loan commitment to the car dealership when you are ready to purchase the car. Use this as a negotiating tool to get a better price on the car.
- Complete the purchase: Once you have negotiated the price of the car and agreed to the loan terms, complete the purchase by signing the necessary paperwork and making any down payment required by the lender.
- Make your payments: Once the purchase is complete, make your monthly payments on the loan. Make your payments on time and in full to avoid late fees and damage to your credit score.
Related: Personal Loan Vs Auto Loan
What is the minimum credit score to buy a car?
The minimum credit score required to buy a car can vary depending on the lender and the kind of car you’re looking at. In general, a credit score of 660 or higher is considered a good credit score and may qualify you for a car loan with favorable terms and interest rates.
However, some lenders may be willing to work with borrowers with lower credit scores, and some even specialize in working with subprime borrowers. These lenders may require higher interest rates and stricter requirements for down payments or cosigners.
What credit scores are used by auto lenders?
Auto lenders commonly use the FICO score as the primary credit score for evaluating an individual’s creditworthiness when applying for an auto loan. While some lenders may use VantageScore as an additional tool for evaluating creditworthiness, it is less common than using the FICO score.
1. FICO score
Auto lenders commonly use the FICO score as a key factor determining an individual’s creditworthiness when applying for an auto loan. The FICO score is a credit scoring model that uses data from credit bureaus to evaluate an individual’s credit risk and predict their likelihood of making payments on time. This score ranges from 300 to 850, with higher scores indicating better creditworthiness. Auto lenders typically use the FICO Auto Score, a variation of the standard FICO score that places more weight on a borrower’s auto loan history and payment behavior.
Learn more: What Is a FICO Score?
While auto lenders can use VantageScore as part of their credit evaluation process, it is less common than using the FICO score. This is because the FICO score is more widely recognized and accepted within the lending industry and has been specifically developed to evaluate credit risk for different types of loans, including auto loans. However, some lenders may use VantageScore as an additional tool for evaluating creditworthiness, particularly if an individual has a limited credit history or if the lender wants to consider a broader range of factors beyond just credit history. Ultimately, the decision on which credit score to evaluate auto loan applications is up to each lender.
cars were sold by the U.S. auto industry in 2022.
How do credit scores affect auto loans?
Credit scores play an important role in determining auto loan terms and interest rates. In general, a higher credit score will result in better loan terms, while a lower credit score may result in higher interest rates and less favorable loan terms.
When you apply for an auto loan, the lender will use your credit score to determine your creditworthiness and assess the risk of lending you money. A higher credit score indicates that you are a lower risk borrower and are more likely to be approved for a loan with lower interest rates and better terms.
On the other hand, a lower credit score may result in a higher interest rate, which means you will pay more in interest over the life of the loan. You may also be required to provide a larger down payment, have a co-signer on the loan, or have more stringent loan terms.
Car loan interest rates based on credit score
Car loan interest rates can vary based on your credit score. The higher your credit score, the lower your interest rate will be. The following are some approximate ranges of interest rates you might expect based on your credit score:
- Excellent Credit (credit score 720 and above): 2.5% – 4.5% APR
- Good Credit (credit score 680-719): 4.5% – 6.5% APR
- Average Credit (credit score 620-679): 6.5% – 9.0% APR
- Subprime Credit (credit score below 620): 9.0% – 15.0% APR or higher
These are just general ranges, and the actual interest rate you qualify for may vary depending on the lender, loan term, and other factors. It’s important to shop around and compare offers from multiple lenders to find the best deal for your situation.
Buying a car with a poor credit score
Buying a car with a poor credit score can be more challenging, but it is still possible. Here are some tips to help you navigate the process:
- Check your credit score: Before applying for a car loan, check your credit score and credit report. Look for errors or inaccuracies that may be bringing your score down. If you find any errors, dispute them with the credit bureau.
- Consider a co-signer: A co-signer with a good credit score can help you qualify for a car loan and may result in a lower interest rate. However, it’s important to remember that the co-signer will be equally responsible for repaying the loan.
- Save for a down payment: A larger down payment can help you qualify for a car loan and may result in a lower interest rate. It also reduces the amount you need to borrow and can make your monthly payments more affordable.
- Shop around: Don’t settle for the first loan offer you receive. Shop around and compare offers from multiple lenders to find the best deal. Some lenders specialize in working with subprime borrowers and may offer more flexible terms.
- Consider a used car: A used car may be more affordable than a new one. Used car loans typically have higher interest rates than new car loans, but the overall cost of the loan may be lower.
Other factors that help you qualify for a car loan
In addition to your credit score, lenders consider several other factors when evaluating your application for a car loan. These factors include:
- Income: Lenders want to see that you have a steady income sufficient to make your loan payments. They may ask for proof of income, such as pay stubs or tax returns.
- Employment history: A stable employment history can demonstrate to lenders that you have a reliable source of income and are less likely to default on the loan. Lenders may ask for employment verification from your current or past employers.
- Debt-to-income ratio: Lenders also look at your debt-to-income ratio, which is the percentage of your monthly income that goes towards paying debts. Ideally, your debt-to-income ratio should be below 40%.
- Down payment: A larger down payment can help you qualify for a car loan and may result in a lower interest rate. It also reduces the amount you need to borrow and can make your monthly payments more affordable.
- Loan term: The length of your loan term can affect your interest rate and monthly payment. Shorter loan terms generally have lower interest rates but higher monthly payments, while longer loan terms have higher interest rates but lower monthly payments.
- Vehicle value: The value of the vehicle you purchase can also impact your loan eligibility. Lenders may have different requirements based on the car’s age, mileage, and condition.
If you make your car loan payments on time, a car loan can help improve your credit score over time. Your credit score is based on several factors, including your payment history, the amount of debt you owe, the length of your credit history, and the types of credit you have.
Making on-time payments on your car loan will demonstrate to lenders that you are responsible with credit and can help establish a positive payment history. This can have a positive impact on your credit score.
However, it’s important to remember that taking out a car loan will also increase your overall debt load, which can negatively impact your credit score if you have a high amount of debt relative to your income.
Additionally, if you miss payments or default on the loan, it can have a negative impact on your credit score.
There is no single FICO score that car dealers use when evaluating loan applications. Instead, dealerships and lenders may use different credit scoring models or versions, depending on their preferences and the credit bureau they use to obtain your credit report.
However, the most commonly used credit scoring models in the auto industry are FICO Auto Score versions, which are specifically designed to predict the likelihood of a borrower defaulting on an auto loan. These scores may differ from the standard FICO score that is used for other types of credit.
The FICO Auto Score versions range from 250 to 900, with higher scores indicating a lower risk of default. Lenders typically set their own cutoff scores for loan approval, but a score of 660 or higher is generally considered a good credit score for a car loan.
The lowest credit score to buy a car will vary depending on the lender’s specific requirements. Generally, a credit score below 600 is considered a poor credit score and may make it more challenging to qualify for a car loan. However, some lenders specialize in working with borrowers who have lower credit scores and may be willing to offer financing options.