Whereas there is no minimum credit score needed for a car loan, your scores can significantly affect your ability to be accepted for a loan and the loan terms.
Low credit scores can result in fewer offers and higher interest rates. However, that does not necessarily mean you should throw in the towel if your scores are not where you want them to be. Keep reading to understand better the potential hindrances and ways you can increase your chances of approval and get better offers.
What credit score is required to buy a car?
As mentioned earlier, there is no minimum credit score to purchase a car. There is not even a single credit score that creditors use.
Various lenders inclusive of credit unions and banks, car finance companies, and sometimes private auto dealerships- might look at multiple versions of your scores; however, typically, they will use your traditional FICO scores or your VantageScore. Both of these deploy a range of 300-850; however, note that less common credit scores may use slightly different ranges.
Some creditors might instead use your FICO Auto Score, which has a wider range of 250-900 and uses data from your credit files to predict your risk of defaulting, specifically a car loan. So there is no exact answer to the question of what credit score is required to purchase a car. The lesser your credit score, the higher the possibility that you will not be approved. And if your credit score is low and you qualify for an auto loan, your interest rate will possibly be much higher, indicating you will pay more- possibly significantly more- over the loan term.
What is a good credit score for an auto loan?
Following Bankrate, people who financed a new car at the end of last year had a standard credit score of 718; applied car borrowers’ scores averaged 659.
Generally, if your score is in the high 700s or is even in the 800s level, you will have no issue securing financing, and you can expect the best interest rates currently on offer. Even car shoppers in the low 700s can expect guaranteed approval and relatively fair rates.
However, if your score is below 700, you can expect a little more difficulty. You surely will not be turned down if your credit score is 680, for instance, but you might have to answer some challenging questions from creditors and offer more documentation to show you can pay back your loan.
Even though your credit score is in the range of 501-600 or 300-500 level, you may not necessarily be unlucky.
All you have to do is understand that you might pay a high-interest rate, sometimes twenty-percent or more, which indicates you can end up paying much more for the same car sold at the same price as someone with a credit score of 780.
Consider two borrowers, one with a 4-percent interest rate and another with a twenty-percent interest rate- They would pay for a five-year loan for $15,000 and a sales tax of 5.5 percent.
The buyer who finances at a four-percent interest rate would pay $1,661 in interest, while the buyer who finances at a twenty-percent interest rate will pay a total of $9, 33. The difference would be $7,500.
Since a subprime score shows that you have had trouble borrowing in the past, ensure you are ready to manage your payments for the whole term of the car loan. If not, you risk defaulting on the loan and destroying your credit score and financial standing even more.
An overview of the average car loan
Note that you have to do your research to know if you are getting a good deal since the numbers keep changing.
The standard loan amount for a new car was $32,187, with a 6.16 percent interest rate as of October 2019, with almost sixty-nine months and a standard monthly payment of $554. The standard loan amount for a used car was $20, 137, with a ten-percent interest rate over almost sixty-five months and a standard monthly payment of $391.
Following Experian, these numbers are up over previous years, and with new auto costs keep on rising, it looks like the trend will keep up. Note that you should not stick with the first loan offer you get, no matter what your credit score is. Look around for different financial institutions, or confirm that the dealership has done it on your behalf. You can obtain a better interest rate with the additional work on your end.
Even though it is only half a percentage point lower, that is more cash in your pocket per month over a lengthy car loan.
Tips to improve your credit score
If your credit score is not where you need it to be and you can not afford to hold off on buying a car until you have improved your credit score, you should do so. Taking one year to get your credit score back to being more stable can make a difference between five-percent and fifteen-percent interest rate.
Here are tips to help you increase your chances of getting a car loan with a fair interest rate.
Work on credit scores
If you work on your credit scores, you can unlock lower interest rates and pre-approvals by more creditors. Your credit is mainly dictated by paying your bills on time and how much debt you owe. Centering on these elements could be a huge help in improving your credit score.
You might also want to lower your credit usage. Try to pay your credit bills in total (no minimum payments) and on time too. Try to maintain your credit utilization ratio as low as possible if it is unavoidable to carry a balance. It is often recommended that you use no more than thirty percent of your overall credit. For instance, for a credit card with a limit of $10,000, you never allow your balance to go above $3,000.
Mostly remember, you do not have to wait until the billing cycle is needed to make credit card payments. Paying off your credit card weekly can be a great habit.
Also avoiding opening a new line of credit. Do not open new credit before you apply for a car loan. Take six steady months with no requests for a new line of credit- and no credit limit increase requests either.
Save up for a down payment
Paying more upfront will lower the amount you require to borrow, assisting you in paying less interest.
Increase your odds of getting a car loan
If you need an auto now, there are yet a few ways you can raise your chances of getting approved for a car loan and decrease your interest rate over time.
- Build credit, and then refinance:It is always worth working on your credit, even after you buy the car. Doing so can enable you to refinance your car loan for a lower interest rate in the future.
- Keep shopping:If you have not found a rate that works for you, keep on looking. Some auto services can show your estimated loan term, monthly payment, and interest rate across lenders such as Credit Karma.
How do I get a car loan with bad credit?
If you are currently in a situation where you cannot afford to wait to buy a car, here are things you can do if your credit score is bad.
- Consider getting a co-signer: Having a co-signer with higher credit scores on your auto loan might make you approved more quickly. After you improve your credit, you can remove the co-signer from your loan if you refinance.
- Try a buy-here-pay-here dealer: In this case, you not only select the car at the dealer but also finance it there. Contrarily to a conventional sale where you use a third-party lender, in this scenario, the dealership itself is the finance company. The choice to approve your loan is made by the same entity that is profiting from the car sale, so they are frequently more flexible in giving financing to people with bad credit scores.
- Look for a second-chance car loan: These kinds of loans do exactly what they say and are specifically meant to give people a second chance of bad credit. If you have been turned down for a conventional auto loan, a second-chance creditor will try to offer you finance options you almost guaranteed to approve.
- You might want to shop for a more affordable economy car and consider buying a used car instead of one.
Generally, your credit scores can affect your chances for approval, as well as the terms and interest rate you will be able to get an auto loan. If you can wait to purchase and use that time to center on improving your credit, you will be better placed. However, if you have to buy the car now, focus on paying your bills on time incorporating your monthly auto loan payments, this will boost your credit score and put yourself on the road to better interest rates in the future.