Credit Score for Car Loans: A Complete Guide
Shopping for a car loan can be a long and intimidating process. With so many lenders, interest rates, and payment plans to choose from, it’s easy to get overwhelmed. One of the most important things to consider when applying for a car loan is your credit score.
Your credit score is a three-digit number that tells lenders how good you are at managing debt and making payments on time. It’s one of the main factors that lenders use to determine whether you qualify for a car loan and what kind of terms you will have. The higher your credit score, the lower your interest rate and monthly payments will be. But what is the minimum credit score to buy a car?
The lowest credit score required for a car loan depends on the lender but is typically set at about 640. However, we by no means are saying that if you have a lower credit score you will not be able to get any car loan at all.
Which Credit Scores Do Car Lenders Use?
A car loan credit score is the range of scores required by a lender to approve your auto loan. Auto loan lenders use different credit scores when considering your application for a car loan. The most common credit scoring models used are FICO® Score 8 and VantageScore 3.0.
FICO® Score 8 is the most widely used credit scoring system, and it’s what most lenders consider when approving a car loan. A score of 700 or above is considered good, and a score of 800 or above is considered excellent.
VantageScore 3.0 is another popular credit scoring model, created as an alternative to FICO. Some lenders use it in addition to or instead of a FICO® Score 8 when considering your car loan application. A VantageScore of 660 or above is considered good, and a score of 780 or above is considered excellent.
If you’re not sure which credit scoring system your lender uses, you can check your credit reports to see which are being reported. And lastly, remember that you can get your free annual credit reports from each of the three major credit bureaus – Equifax®, Experian®, and TransUnion®.
How Do Credit Scores Affect the Costs of a Car Loan?
Your credit score plays a big role in the car-buying process. The cost of a car loan is determined by many factors, but your credit score is one of the most important. A higher credit score means you’re seen as less of a risk to lenders, and you’ll likely be approved for a loan with lower interest rates and monthly payments. A lower credit score could lead to higher interest rates and smaller loan amounts, so it’s important to know where you stand before you start shopping for a new car.
The credit score required for a certain car loan can be divided into a form of credit tiers and this is how each tier affects the loan:
- Superprime. This is the top credit tier you can be in when qualifying for car loan rates. To be in this tier, you have to have a credit score between 781 and 850. As this is the best credit bracket to be in, there are several benefits to being a superprime buyer. These benefits include not having to provide a co-signer and extremely low rates on an auto loan, averaging around 3.61%.
- Prime. Prime buyers have a credit score between 661 and 780. This is a good credit score for a car loan and allows you to easily qualify. Prime buyers get similar benefits to superprime, not requiring co-signers but with slightly higher interest rates of around 5.5%
- Nonprime. This tier is where auto loans for bad credit come into play. A nonprime credit score is between 601-660. In case you fall into this category you may have to get a co-signer, and you will experience higher interest rates, averaging 9.8%.
- Subprime. Below nonprime is the subprime credit bracket. Subprime buyers have credit scores ranging between 501 and 600. They need co-signers and will have rates around 16% which is fairly high.
- Deeper subprime. The final and lowest credit tier for car loans is deeper subprime. Buyers in this tier have credit scores varying from 300 to 500. As a deeper subprime buyer, it can be challenging to qualify for an auto loan, and bad credit car loan lenders are typically the only way to qualify. Interest rates for these deeper subprime car loans average around 19.87%, and a co-signer is required.
How to Get a Car Loan Even If You Have Bad Credit
In case you’re looking for a car loan but have bad credit, there are a few things you can do to improve your chances of getting approved. One option is to get a co-signer with a good credit score to help you qualify. Your co-signer should be someone you know and have a good relationship with as deciding to help you out this way certainly isn’t an easy decision without risks.
Additionally, you can try to find a lender that specializes in loans for people with bad credit. There are many of them willing to work with you and you just need to dedicate some time to finding the best one.
Another option is to get a secured loan, where you use your car as collateral. This can be a good option to secure a more manageable interest rate as lenders will see your loan request as a less risky option.
And lastly, if you are in no rush, it could also be a good idea to wait for a bit and improve your score first before applying anywhere.
How to Quickly Improve Your Credit Score
Improving your credit score doesn’t have to be a daunting task you keep postponing. And there are a few things you can do that don’t require that much effort. First, make sure you’re paying all of your bills on time. This includes any credit card bills, loans, or other debts you may have. Late payments can negatively impact your credit score. This is particularly important because these payments are all kept on your credit history which has the biggest impact on your score.
Second, try to keep your credit card balances low. High balances can also hurt your credit score. This is a part credit utilization ratio and you should try to keep your spending under 30% of your credit limit.
Third, avoid opening new lines of credit unless absolutely necessary. Every time you open a new account, it can lower your average account age, which can hurt your credit score. If you do need to open a new account, make sure it’s for something that will help improve your financial situation, like a lower interest rate or a rewards program.
Fourth, dispute any errors on your credit report. If there are any inaccuracies in your report, they could be dragging down your score unnecessarily. You can file a dispute with the three major credit bureaus online or by mail and by doing so you will raise your score quite a bit.
Finally, consider using a credit counseling or debt management service if you’re struggling to get control of your finances and improve your credit score on your own. These services can help you create a budget, negotiate with creditors, and set up affordable payment plans that work for both sides.
In conclusion, obtaining a car loan with a lower credit score is possible. However, it can be more difficult to find lenders willing to work with those who have bad or poor credit scores.
The best advice for someone looking to get the lowest rate on their car loan is to first take steps to improve their credit score before applying for financing. Doing so will help you demonstrate your financial responsibility and increase your chances of getting approved at a better rate.
Lastly, if you are able to follow the tips we gave you, your score will be back in a good shape in no time so there doesn’t have to be a long wait process for you to get your new vehicle.