So, you’re in the market for a car but haven’t been able to save enough money to buy one outright. In such cases, the only option is to try and get financing.
Buying a car is a massive investment and a huge financial step. Whether you apply for a loan at a bank or through a dealership, they are going to run a credit check on you as part of the process.
Find out all you need to know about credit scores and what you can do if your credit score is less than perfect.
What is a Credit Score?
A credit score is something lenders refer to as a prediction of your credit behavior. It indicates how likely you are to pay a loan back on time. It is based on information gathered from your credit reports.
A mathematical formula, called a scoring model, is used to create your credit score. Factors that are taken into account include:
- Current unpaid debt
- Bill-paying history
- Number and type of loan accounts you have
- How much of your available credit you’re using
- How long your loan accounts have been open
- New credit applications
- Whether any debts have been sent to collection, foreclosure, or a bankruptcy
You can have more than one credit score. Each one will depend on the data used and the scoring model used to calculate the score.
In general, the higher your credit score, the easier it will be to qualify for a loan. It might also result in better loan terms or interest rates. Most credit scores range from 300 to 850.
What Credit Scores do Auto Lenders Use?
Around 90% of lenders use the FICO (Fair Isaac Corporation) Score. There are numerous versions and industry-specific scores, including one for the auto lending industry. Industry-specific scores also have different versions.
Individual lenders make their own decision when it comes to the credit score model it uses. Unless you ask, you won’t know which credit score they check, so it’s best to check your general-purpose FICO score. Checking your credit score before you apply for a loan means you won’t be disappointed.
VantageScore is also used by lenders. Scores range from 300 to 850. VantageScore weighs factors differently than FICO and uses a different set of metrics. These usually include depth of credit, payment history, balances, utilization, available credit, and recent credit.
Credit scores are broken into tiers. Experian gives the following tiers and score range for auto loans.
| Category | Score Range |
| Super prime – you will likely qualify for the lowest rates if your credit score is in this tier. You might also be eligible for zero percent financing offers or rebates. | 781 – 850 |
| Prime – the average interest rate for this tier is 3.56%. | 661 – 780 |
| Nonprime – your credit score is considered fair. Interest rates are slightly more favorable with an average of 6.7% | 601 – 660 |
| Subprime – you will likely have more borrowing options, but it might still pay to raise your credit score before you apply. Interest rates for this range average 10.87% | 501 – 600 |
| Deep subprime – you will likely face high-interest rates. The average is around 14.76%. However, depending on other factors and your income, you might not qualify for financing with a credit score of 500 or less. | 300 – 500 |
Most lenders use your FICO Auto Score when evaluating your car loan application. It may be lower or higher than your regular credit score, depending on any previous auto loans you might have.
Your exact FICO Auto Score may also vary from lender to lender. Each of them reviews your credit report information and weights it according to what is considered the most important.
What is a Credit Report?
A credit report contains information about your current credit situation and your credit activity. You can have more than one credit report and it will show your loan paying history and the status of your credit accounts.
Credit reports are created by credit reporting companies. You might also hear them referred to as consumer reporting agencies or credit bureaus. They collect and store financial information about you. This information is given to them by lenders, credit card companies, other lenders, and financial companies.
The three credit reporting companies that contribute information to your credit score are TransUnion, Experian, and Equifax.
A lender will use your credit reports to help them decide whether you’re worth the risk of lending money. They also help lenders decide on the interest rate to offer you. It’s not just lenders that use the information contained in your credit reports. Your employer might ask to look at your credit report, for example. A potential landlord, utility, or cell phone service provider might also use your credit reports to make a decision about you.
What is the Minimum Credit Score Needed to Buy a Car?
There is no official minimum credit score required if you’re applying for an auto loan. Lenders tend to have their own minimum standards that they look for when reviewing a loan application.
According to a 2021 report from Experian, the average credit score for used car loans in the US was 665. For new cars, the average credit score was slightly higher at 732.
A general rule of thumb is that the lower your credit score, the higher rate of interest you’ll be paying. However, it’s not the only factor a lender uses to determine your auto loan interest rate. The lender might also take into account your employment history, your income, and your debt-to-income ratio.
What is a Debt-to-Income Ratio?
Your debt-to-income ratio compares how much you owe each month to how much you earn. To calculate this figure, you add up all your monthly debt payments and divide them by your gross monthly income.
A good debt-to-income ratio is 43% or below.
What is a Good Credit Score for Buying a Car?
A credit score that’s 670 is categorized as “Good” by FICO. Anything higher than 800 is considered an “Exceptional” FICO score.
How Your Credit Score Might Affect an Auto Loan
Credit scores are a numerical representation of how likely you are to repay a loan. A high score means you’re less risky and more likely to receive favorable loan terms and interest rates.
You can benefit from a good credit score in several ways when you’re buying a new or used car.
- Interest rates tend to be lower: a good credit score of 680 or above could help you secure a low-interest rate. If your score is between 600 and 780, there is the potential to cut your interest rate in half.
- Monthly payments might be lower: With a lower interest rate, your monthly car payments are also going to be lower. This might leave room in your budget for other financial priorities.
- A smaller down payment might be required: If your credit score is good it could help you avoid making a large down payment. You might also qualify for a lower loan term. That being said, there are benefits to making a large down payment.
- Better chance of approval: When you have a good credit score, it improves your chance of getting a loan approved.
Can You Still Get a Car With Bad Credit?
Even if your credit score is less-than-perfect, all is not lost. Admittedly, you may pay a higher interest rate or be forced to give up certain perks. There might also be lenders and dealerships that refuse to work with you, leaving you with limited options if you don’t have the cash to pay for your car.
However, there are ways you can get a car if your credit is bad.
- Look for a subprime loan: This type of loan is riskier for the lender. People with low credit scores can make an application but you can expect to pay high fees and interest rates,
- Go to a buy here, pay here dealership: This type of dealership will offer you a loan but the interest rates will be high and you will also have to pay additional fees for financing. In addition, you might have to purchase gap insurance. If you’re thinking of taking this option, be sure to shop around and make comparisons.
- Pay cash: You’ll be able to skip the auto financing process completely if you’ve got enough cash to cover the cost of the vehicle you want to buy.
- Work on improving your credit score: If buying a car is not urgent, work on your credit score and look for ways to improve it. For example, pay off a few small debts, increase your available credit, or avoid opening new credit card accounts.
- Check if there are errors in your credit report: If you find any errors in your credit report be aware it can take up to 30 days to get any mistakes corrected.
Prequalify or Get Pre-Approval for an Auto Loan
If you’re not sure whether your credit score is good enough, there is the option to prequalify or get pre-approval. These result in a soft credit pull that won’t negatively impact your credit score. It’s a way of getting a more realistic view concerning your chances of approval.
Other Options
If you don’t pre-qualify or get pre-approved for a loan, all is not lost. Perhaps you should consider a trade-in or down payment. These will lower your prospective loan amount and improve your likelihood of qualifying.
Another option is to look for a co-applicant with a better credit score than yours. They co-sign your loan and legally enter the contract with you as part owner of the car. They are also dually responsible for loan payments.
Final Thoughts
Credit scores are just a small part of the equation when it comes to auto financing. Every lender may also have different requirements. Don’t be put off looking for a new car because there are plenty of options.
Once you’ve purchased your dream car, leave it to USTrans.com to get it home for you. Distance is no barrier when you’ve got an auto transport company you can rely on. Start looking for your new car online today.
What credit score is needed to buy a car without a cosigner?
A good credit score for an auto loan without a cosigner is 660 or higher. However, a lender will consider other factors when making their decision. For example, car finance companies also weigh the down payment size, debt-to-income ratio, and employment stability when making their decision.
What credit score is needed to buy a car with zero interest?
In general, a credit score of 780 or more may mean you’re eligible for a zero-interest auto loan.
What credit score is needed to buy a car with no money down?
Generally speaking, a lender will require a minimum credit score of 600 to give an auto loan without any down payment. However, it is possible to purchase a car with a score of 400 or a score of 850. It all depends on several variables that weigh into determining your eligibility for a loan.
What credit score is needed to buy a new car?
For most new car loans, a lender will look for a credit score in the prime range of better. In other words, you’ll need a score of at least 661. A higher score will get a better interest rate.