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Smart Money

What Credit Score Is Needed to Buy a Car?

Your credit score plays a huge role when it comes to financing a new or used vehicle. Learn how your credit score impacts your approval and interest rates, and how you can be a more favorable candidate for car ownership.

Choncé Maddox • December 9, 2021

Ready to buy a car?

A car may be one of the most expensive purchases you’ll ever make — second only to a home. In January 2021, the average price for a new car was $40,857, according to Kelley Blue Book. That’s a whole lotta dough.

While you can certainly save money by buying a used car, you will still need to come up with enough cash to drive away in your new wheels. If you don’t have the money on hand, your other option is to get a car loan.

Car loans can certainly help you buy a car, but in order to get approved for a loan, you’ll generally need a good credit score and money in the bank for a downpayment. Read on to learn more about car loans and how your credit score can help you buy a car.

In This Article

  1. How Do Car Loans Work?
  2. Credit Scores To Buy a Car
  3. Average Car Loan Interest Rate By Credit Score
  4. What Do Lenders Look For in Credit?
  5. How To Improve Your Credit Score Before Applying for a Car Loan
  6. Temporary Alternatives to Financing a Car
  7. FAQs
  8. Final Thoughts

How Do Car Loans Work?

Car loans are similar to other types of loans. You usually have to come up with a down payment, and you can then apply to borrow the rest. You can get a car loan at an auto dealership, or at a bank or credit union. There are also some online lenders that specialize in car loans.

Some car dealerships will allow you to trade in your current car and use the value as a down payment for the new car. They will then run your credit and shop around for the best lender for your loan. This can take some time, which is why it’s not uncommon to spend several hours at the car lot as you wait for a financing decision.

Once you have been approved for a car loan — either at a dealership or through another lender — you can review loan terms and sign paperwork. You’ll be given an interest rate based on your credit score, income, and debt-to-income ratio (how much you already pay toward your debt each month compared to how much income you bring in.)

Generally, you’ll be asked what your budget is for a monthly car payment. Lenders can shorten or lengthen your loan repayment term based on this preference. For example, you can get a 36-month car loan or even a loan that will take you 7 years to pay off. The longer the loan, the more interest you’ll typically pay over time.

Credit Scores To Buy a Car

Your credit score is the number one factor that will determine whether you get approved for a car loan or not.

Of course, if your credit score is excellent or above average, you can rest assured that you’ll likely get a loan with the best terms. If you have no credit whatsoever, you probably won’t be approved for a car loan, and it’s time for you to start building your credit.

Each quarter, Experian publishes a report detailing the state of the automotive finance market. This is how Experian, as well as most lenders, rank borrowers’ credit scores:

  • Super prime: 781 – 850
  • Prime: 661 – 780
  • Nonprime: 601 – 660
  • Subprime: 501 – 600
  • Deep subprime: 300 – 500

In general, you’ll want a score of 661 or higher to qualify for most conventional car loans and to obtain the best interest rates. 

Average Car Loan Interest Rate By Credit Score

In the second quarter of 2021, the average credit score for a used-car loan or lease was 665, while the average score for a new-car loan or lease was 732, according to Experian’s State of the Automotive Finance Market quarter 2 report.

Here are the average interest rates you can expect depending on your credit score.

Credit scoreAverage loan rate for a new carAverage loan rate for a used car
Super prime: 781 – 8502.34%3.66%
Prime: 661 – 7803.48%5.49%
Nonprime: 601 – 6606.61%10.49%
Subprime: 501 – 60011.03%17.11%
Deep subprime: 300 – 50014.59%20.58%

Source: Experian State of the Automotive Finance Market, Q2 2021

Clearly, having a higher credit score will get you the best terms and the lowest interest rates. And this can save you a ton of money as you repay your loan. If your credit score is subprime or worse, it’s probably a better idea to work on building your credit before applying for a car loan.

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What Do Lenders Look For in Credit?

If you want to build your credit score or improve it, you first need to understand how credit works. Lenders typically use the FICO® Score or VantageScore credit-scoring models when considering whether to approve your car loan application. FICO Score is a specific credit scoring model, but it helps to understand how it works so you’ll know which areas of your credit report to focus on. 

According to MyFico, credit scores are calculated by using these 5 main factors:

  • Payment history – 35%
  • Amounts owed (overall utilization of your credit limits) – 30%
  • Length of credit history – 15%
  • Credit mix – 10%
  • New credit – 10%

As you can see, your payment history and amounts owed hold significant weight in terms of determining your score. If your score is low, odds are your payment history is not good.

How To Improve Your Credit Score Before Applying for a Car Loan

So, how long does it take to improve your credit? Depending on how much work you need to do, some experts state that you can improve your credit in as little as a few weeks to up to 18 months. To start making improvements, you can do the following:

  • Try monitoring your credit and tracking your improvement by using free sites like Credit Karma and Credit Sesame.
  • Use your credit cards wisely, which includes paying off some debt to lower your balances.
  • If you see missed payments or defaults on your credit report, contact the lenders to find out if you can settle the balance.
  • If you have no payment history whatsoever, consider getting a secured credit card and putting a small monthly charge on it. Then, pay it off in full each month to build some positive payment history.
  • Keep your credit utilization under 30%. This means that if you have a credit card with a $2,000 limit, for example, you shouldn’t carry a balance of more than $600. Going above and beyond that amount tells lenders that you can’t control your spending and rely on credit too much. If you aren’t making consistent payments on your balance on top of that, this makes you look like a risky borrower.

Temporary Alternatives to Financing a Car

If you have bad credit or no credit at all, now is a good time to try transportation alternatives to buying a car. For example, while working on building your credit, you can give public transportation or carpooling a whirl.

Or, you can try buying an older used car with cash just to get you from one place to another. You can use windfalls like a tax refund or bonus payments from your job to help you round up the money to buy a cheap car. This might hold you over until you can beef up your credit score and apply for a car loan for a new car. 

FAQs

Is it possible to buy a car with bad credit or no credit?

If you have bad credit, it’s still possible to get a car loan. In fact, there are some lenders that work specifically with people with lower credit scores. Research your options and consider a co-signer or making a large down payment if you’re having trouble getting approved or finding acceptable rates.

If you don’t have any credit history, getting a car loan will be more difficult. You will need to show that you can repay the loan in other ways. Consider some of the following to demonstrate to lenders you are not a risk without any credit history: 

  • A full-time, secure job with regular income
  • A “high enough” income to comfortably make the repayments on the loan
  • No history of dishonour fees, late payments on bills, or failed payments
  • A lucrative savings account

Is there a minimum credit score to buy a car?

There is no minimum credit score to buy a car. Credit requirements for car loans vary by lender, since lenders make their own rules for how to evaluate your credit. In general, most lenders like to see a score of 661 or higher to show that you are a low-risk borrower. Keep in mind that lenders often look at multiple aspects of your finances when considering you for a car loan, such as income, debt, and whether you’ve paid past loans back on time.

What credit score is needed to lease a car?

Similar to buying a car, when you lease a car you will need a favorable credit history. There is no minimum credit score needed to lease a car, but, typically, the higher your credit score, the less you’ll have to pay at the time of signing, and the less you’ll need to pay monthly.

How much will a car loan drop my credit score?

Applying for an auto loan might ding your score temporarily, because a hard inquiry will be made to your credit report. If you qualify for and accept a loan offer, you’ll typically see another small drop in your credit score. It’s hard to predict how much your credit score will drop, but in general, hard inquiries can reduce your credit score anywhere from 5 – 10 points for about a year.

Does a car loan build credit?

Car loans, like most loans, have the ability to help build your credit as long as you make on-time payments. How soon and by how much a car loan will raise your credit score depends on many factors such as payment history, amounts owed, length of credit history, new credit, and credit mix.

What is a FICOⓇ auto score?

A FICO automotive score is an industry-specific credit score intended for auto lenders. Fico auto scores are specialty scores ranging from 250 to 900. FICO auto scores weigh past car-loan payments more heavily than the traditional FICO score does. It also gives more weight to any repossessions or auto-loan bankruptcies you might have previously filed. 

Keep in mind that some dealers might use a FICO auto score instead of a traditional FICO Score or VantageScore.

Final Thoughts

Don’t lose hope or patience if your credit score needs to be improved before you finance a car. The benefits of working your way up to an excellent credit score will be well worth it when you get a car loan with better terms and a lower interest rate.

Remember: A lower interest rate for your car loan will potentially save you thousands of dollars. Are you ready to start building your credit?

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