Auto Loans

What Credit Score Is Needed to Buy a Car?

While there is no set credit score you need to qualify for an auto loan, the higher your score, the better the interest rate could be on your loan. Each lender has its own credit requirements and may take additional factors into consideration, such as your income and other debt obligations.

Borrowers with poor credit are able to get financing for a new car, but your lender options may be limited and you may have to make a larger down payment.

Understanding credit scores for auto loans

One of the first things that’s important to understand about credit scores and auto loans is that there’s more than one scoring system. Auto lenders also use industry-specific scores, including FICO Auto Scores 2, 4, 5, 8 or 9. The bad news is that you won’t necessarily know what model your lender is using to evaluate your credit, but you can get an idea of where you stand from your base FICO credit score.

Average car loan interest rates by credit score
Score Range New Cars Used Cars
850 – 781 3.82% 4.43%
780 – 661 4.75% 6.15%
660 – 601 7.55% 10.85%
600 – 501 11.51% 16.88%
500 – 300 14.25% 19.81%

Source: State of the Automotive Finance Market (Q4 2019)

Learn how you can check your score with LendingTree. You can also buy your FICO Auto Scores for $19.95 a month. Your bank or credit card company may also furnish certain credit scores, free.

How credit score affects your car loan

Borrowers with good or better credit have a high likelihood of being approved by many lenders and, as the table above shows, of receiving a better rate. You can still be approved for an auto loan if you have bad credit, but will likely pay higher interest rates, which could add thousands of dollars to the cost of loan repayment.

Example

Consider Borrower A and Borrower B who each take out a $10,000 loan for a used car for five years. For the sake of this example, we’re not including sales tax or other fees, down payment or trade-ins.

Borrower A Borrower B
Rate 4.43% 16.88%
Monthly Payment $186.11 $247.88
Total Interest Paid $1,167 $4,873

 

Borrower B with fair credit pays about $3,700 more in overall interest than Borrower A, who has excellent credit.

4 steps to take before you apply for a car loan

Getting the loan you want may take some effort, but following the steps below can help your chances of qualifying for the best terms possible.

Step 1: Monitor, improve your credit.

Monitoring your credit information is an important part of preparing for an auto loan application, since it can give you a chance to make improvements and fix errors. Rod Griffin, Experian’s senior director of public education and advocacy, advises pulling your credit report three to six months before purchasing a vehicle.

Credit report vs. credit score

Contrary to popular myth, pulling your own credit reports and reviewing your scores does not hurt your credit rating in any way. However, it is important to understand the difference between credit reports and credit scores.

Credit reports do not contain your credit score, but rather, that score is calculated based on information in those reports — think of your credit score as a quick snapshot of how good your credit is. You may pull free copies of your credit reports at AnnualCreditReport.com.

If your credit is poor and you don’t need a new car right away, take some time to understand and improve your credit rating.

Step 2: Save for a down payment.

Making a down payment on your car means borrowing less and potentially getting a lower interest rate, both of which will save you money on the overall cost of repayment.

Step 3: Consider a cosigner.

A cosigner agrees to take responsibility for loan payments if you’re unable to pay. Having a cosigner gives the lender added assurance that the loan will be repaid, and can increase your chances of approval.

Step 4: Research lenders.

Some lenders have stricter credit requirements than others. Comparing multiple lenders can help you find one that works with your credit tier. A few to consider:

LightStream: Best for those with strong credit
New Cars Used Cars
Starting APRs 3.49% – 8.34% 3.49% – 9.19%
Terms  24 – 84 months 24 – 84 months
Loan Amounts $5,000 to $100,000 $5,000 to $100,000

 

LightStream is an online lender focused on lending to borrowers with good or excellent credit scores (generally 660 or higher). It offers fixed rate loans for new and used vehicles, with no prepayment penalty. The maximum APR for a LightStream loan is 20.49%.

Carvana: Best for those with fair credit
APR Range 3.90% –28.00%
Terms 36 – 72 months
Loan Amounts Up to $125,000

 

You can use Carvana to shop for a used car online and finance that car. If you have bad credit but are 18 or older, have no active bankruptcies and make at least $4,000 a year, Carvana may approve your auto loan application.

Capital One: Best for those with poor credit
Starting APR 3.39%
Terms 36 – 84 months
Loan Amounts Starting at $4,000

 

Capital One offers prequalification, which helps borrowers with poor credit get an idea of whether they qualify, without hurting their scores. Financing is available for vehicles with a model year of 2010 or newer and less than 120,000 miles.

Get preapproved.

Getting an auto loan preapproval from a preferred lender — or ideally, more than one — gives you an idea of the interest rate, term and maximum car loan amount you may receive. Plus, it could also give you more bargaining power at the dealership.

Before you refinance your car loan

Auto refinancing could make sense if you’ve raised your credit score or increased your income since taking out your original auto loan. And if you’re able to lower your interest rate and or/term, you could save money over the life of your auto loan. A refinance can also help you get a lower monthly car payment.

Again, while there’s no set credit score that all lenders require, a lender considering your refinance loan will most likely look at your payment history, credit utilization and other factors considered the first time around.

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FAQs

What is a good credit score for an auto loan?

The higher your scores, the better. Scores above 780 are likely to qualify for the lowest available interest rates.

What credit scores do car dealerships use?

A dealership traditionally does not offer its own financing — it may offer manufacturer financing or loans provided by a network of banks, credit unions and finance companies, and it’s these lenders that determine if you qualify.

Be wary of “buy here pay here” car lots that offer in-house financing and say things like “no credit check,” as they may come with high interest rates and other penalties.

Will a car loan improve my credit score?

In the short term, you may actually see a dip in your scores. That’s because applying for a loan costs a few points, and once you take on the new debt your credit scores will drop to reflect the new risk. After several months of on-time payments, you’ll likely regain the lost points and even see additional growth in your scores.

 

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