Your car is your gateway to work, shopping, and everywhere life takes you, so unless you live in a major city, you probably couldn’t imagine life without it.
But unfortunately, cars don’t come cheap.
Financing your car purchase with an auto loan can help you feel secure in your new car, without requiring you to drain your bank account.
However, as with any loan, your credit score will be one of the most important factors when it comes to qualifying for funding and finding preferable terms like a low-interest rate. What credit score do you need to buy a car, and what happens if you have bad credit? Ultimately, the answers will depend on where you are looking for financing and what your financial picture looks like.
How Your Credit Score Can Affect Car Financing
The good news about auto loans is that most lenders are typically open to issuing loans to those with lower credit scores. But – the lower your score, the fewer options you may have and the higher your interest rate will be.
Borrowers with higher credit scores will have more financing options. Dealerships, which work with a network of different lenders, will be happy to help you secure a loan if you have an excellent score. However, a dealership will also typically present the highest interest rates to low-credit-score borrowers, and may markup any rates you could get directly from lenders.
If you’ve ever asked yourself “what credit score do I need to buy a car” then it’s important to understand the factors that determine your score. When it comes to auto lenders, they will want to see that you’ve been responsible for any past account payments and that you are not using up too much of your credit with existing debt. Auto lenders will calculate a debt-to-income ratio that compares your monthly income to any existing debt payments, whether from credit cards or other sources, and will look for your ratio to be 40% or less. In this scenario, if you currently earn $2,000 each month, your ideal total debt payments, including your new car loan, will be $800 or less a month.
What Credit Score Is Needed To Buy A Car?
Auto loan interest rates will vary depending on your credit score. However, unlike other types of loans where a low credit score may disqualify you from borrowing entirely, with auto loans, you may still qualify for financing with a lower score – but at a cost.
For example, with a credit score of 720 or higher, you can expect auto loan rates to range between 2-4%. On the other hand, credit scores between 501-600 may only qualify for what is known as subprime loans, and interest rates can be as high as 10-15%. When borrowing with an interest rate over 10%, it’s essential that you calculate how much more you’ll be paying for that car over the life of the loan, and it may be in your best interest to start improving your credit before you apply.
The FICO® Auto Score
In some cases, auto lenders may be looking at your FICO® auto score and not your regular score. Your main score will be used as a base point, but FICO® auto scores range from 250 to 900, as opposed to 300 to 850 for traditional scores.
The auto score looks at specific trends in your borrowing behavior, including:
- Increasing or decreasing credit card balances
- Whether you pay more than just minimum required payments
- How your credit utilization ratio looks
In terms of benefits for you, the newest FICO® auto score doesn’t penalize borrowers who have paid off accounts that were in collections. It also looks specifically for unpaid medical bills, and doesn’t hold these against you as much as other types of outstanding balances.
How To Improve Your Credit Before Applying For An Auto Loan
If you’re in the market for a new car loan and are looking for some quick ways to improve your credit score before you apply, these tips can help you protect your credit before and during the loan shopping process.
Check your credit: Before you can figure out what credit score is needed to buy a car, you’ll need to know what your score looks like. At a minimum, you should request your credit reports so you can look for any erroneous or fraudulent information. You can order your actual score from the bureaus for a small fee, or go through FICO® to get a copy of your report and the FICO® auto score, which is used by many lenders.
Restrict yourself to a two-week loan shopping period: When you apply for a loan, the lender will check your credit, which can drop your score slightly. If you apply for a number of different loans over an extended period, you may find you’ve hurt your chances of qualifying for prime rates. Instead, limit your loan search to two weeks so that the bulk of these inquiries are done at the same time.
Pay down credit cards: Because credit utilization and your current balances affect your credit score, aim to pay off as much as possible before you apply for a loan. The less debt you carry, the more you can feel confident about adding a new loan.
How To Increase Your Odds of Qualifying For A Car Loan
Whether you have excellent credit or poor credit, there are certain steps you can take to make it easier to qualify for an auto loan. What credit score do you need to buy a car when you take these additional steps? You might be surprised how your chances of qualifying improve.
1. Shop around
Did you decide to buy the first car you saw? Probably not, and the same should go for your auto loan, especially if you have less-than-excellent credit. The first place you may be offered a loan is at a dealership, but those rates may be higher than what you could get directly from a lender, and you won’t know if you don’t shop around. Look for credit unions and online lenders that often have reasonable rates and less stringent qualifying criteria than major banks or lenders. Ask them “What credit score do I need to buy a car,” and you’ll probably find that each lender has a different answer.
2. Make a larger down payment
Whenever you put down a more substantial down payment, you’re taking out a smaller loan – and paying less interest overall. Cars also depreciate quickly, so putting down a larger amount means that you’ll protect yourself from a situation where you owe more than the car is worth. If you have bad credit, when you put more money down, you’ll have more leverage to negotiate your interest rates.
3. Get a co-signer
If you have someone with excellent credit who is willing to cosign your auto loan, you’ll be able to use their credit score as a way to qualify for better rates and terms. However, a cosigner will be liable for the loan should you default, so be sure to consider how your relationship could be affected.
4. Get preapproved
When you get preapproved for an auto loan, you have a starting point to negotiate with other lenders. You don’t need to accept a loan that you’re approved for, but you can show the dealership and other lenders that you have financing secured – and that they have a chance to beat that offer if they want your business.
As with any financing, your credit score is one part of the picture when it comes to qualifying. You’ll need stable income and a healthy balance between what you owe and what you make. If you’re concerned that your finances aren’t in the right shape to qualify for a loan, start taking simple steps to improve your credit, and you’ll find more options opening up.