If you’re planning to buy a car, whether new or used, you may not want to pay the full price upfront. Financing through a car loan can be a great option. But did you know your credit score can have a huge impact on the terms of your loan?
Lenders rely heavily on credit scores to decide the type of loan you can get, your interest rate, and how much you can borrow. If you’re wondering what credit score you need for a car loan, keep reading to find out.
How Lenders Use Credit Scores
Lenders use your credit score to evaluate how risky it would be to give you a loan. Your credit score is based on your credit history, which includes factors like payment history, current debts, and the types of credit you have. Most lenders use credit scores ranging from 300 to 850, with higher scores indicating better creditworthiness.
In addition to the basic credit score, lenders may look at your FICO Auto Score, a special score that focuses specifically on your history with car loans.
Minimum Credit Score to Buy a Car
There’s no fixed minimum credit score to get a car loan—it depends on the lender. However, here’s a general guide:
- Excellent Credit (700+): Qualifies for the lowest interest rates and best terms.
- Good Credit (650-699): May still get competitive rates, but not as low as those with excellent credit.
- Fair Credit (600-649): Could get approved but with higher interest rates.
- Poor Credit (500-599): Approval is possible, but you may face high interest rates.
- Very Poor Credit (Below 500): Financing options are limited, but some lenders may still approve you with a large down payment.
How a Bad Credit Score Affects Car Loans
A bad credit score can make it harder to secure a loan, and even if you do, the loan may come with:
- Higher interest rates, sometimes as high as 17% or more
- Higher monthly payments
- Larger down payment requirements
For example, someone with a credit score between 501-600 may get an interest rate of 17.78%, while someone with a score of 700+ might get a rate around 5%.
How to Improve Your Credit Score Before Buying
1. Check and Correct Your Credit Report
Go to AnnualCreditReport.com for a free report and review it for errors. Disputing mistakes can boost your score.
2. Diversify Your Credit Mix
If you only have credit cards, consider adding other forms of credit, like a personal loan.
3. Pay Bills on Time
Your payment history significantly affects your score. Setting up automatic payments can help.
4. Increase Your Credit Limits
Call your creditors and ask for higher limits. This lowers your credit utilization ratio, which can improve your score.
5. Pay Down Outstanding Balances
Try to get your credit utilization ratio below 30%. This will show lenders that you manage credit responsibly.
How to Get a Car Loan with Bad Credit
If you have poor credit and need a car, here are some tips:
1. Save for a Down Payment
A large down payment reduces the loan amount and shows lenders you’re serious about paying off the loan.
2. Set a Budget
Decide on a car price you can afford and stick to it. Taking on too large a loan can strain your finances.
3. Shop Around for the Best Loan
Don’t settle for the first offer. Explore various lenders like banks, credit unions, online lenders, and car dealerships to find better rates.
4. Consider a Cosigner
Having someone with a strong credit score cosign your loan can improve your approval chances and lower your interest rate.
Where to Get an Auto Loan
1. Car Dealerships
Many dealerships work directly with lenders to help you find financing options, especially if you have poor credit.
2. Online Lenders
Online lenders often offer prequalification, making it easier to compare rates without affecting your credit score.
3. Credit Unions or Banks
Credit unions may offer better rates than traditional banks and may consider your membership history when approving loans.
4. Buy-Here, Pay-Here Dealerships
If you can’t get approved elsewhere, these dealerships offer financing directly. However, their interest rates tend to be higher.
Your credit score plays a crucial role in determining the car loan you’ll qualify for and the interest rate you’ll receive. Improving your credit score even slightly before applying can save you thousands in the long run.
If you have poor credit, explore multiple options, consider a cosigner, and save for a down payment to improve your chances of getting an affordable loan. Planning ahead can help you drive away with a loan that fits your budget and lifestyle.
FAQ’s
What Credit Score Do You Need for a Car Loan?
The credit score needed for a car loan varies by lender. In general, scores of 600 or higher improve your chances of securing better rates. However, some lenders offer loans to borrowers with scores as low as 500, but expect higher interest rates.
Can You Get a Car Loan with Bad Credit?
Yes, you can get a car loan with bad credit, but you may face higher interest rates and larger down payment requirements. Exploring options like online lenders, credit unions, or getting a cosigner can help secure a loan despite poor credit.
Does a Higher Credit Score Lead to Lower Interest Rates?
Yes, a higher credit score often results in lower interest rates on car loans. Borrowers with excellent credit (700+) typically receive lower rates compared to those with fair or poor credit.
How Can I Improve My Credit Score Before Applying for a Car Loan?
To improve your credit score, focus on paying bills on time, reducing your credit card balances, and reviewing your credit report for errors. You can also diversify your credit mix and ask lenders to increase your credit limits.
Can a Cosigner Help Me Get Better Car Loan Terms?
Yes, having a cosigner with a strong credit score can help you qualify for better interest rates and loan terms. The cosigner shares responsibility for the loan, reducing the lender’s risk.