Do you plan to buy a car but don’t have the funds to pay for it? If so, you’re probably considering taking out a car loan. However, getting your hands on a good auto loan offer can seem like a difficult task if you’re dealing with a bad credit score.
Although there’s no specific minimum credit score you need to get a car loan, your credit still plays a massive part in the process. Keep reading to learn everything you need to know about auto financing and credit scores.
What Is the Minimum Credit Score for a Car Loan?
Credit requirements for car loans, or advances of any kind, vary depending on your lender. Typically, lenders evaluate your credit and other financial factors based on the criteria they create. Hence, there isn’t an industry standard dictating the minimum credit score needed for an advancement on a car.
Note that your credit report isn’t the only aspect of your finances that lenders analyze. They also go over your employment status, income, debt-to-income ratio, and loan history.
What Is a Good Score to Buy a Car?
Based on statistics from the second quarter of 2020, we discovered the average credit scores of auto loan borrowers. People who received a cash advance for a new car had an average credit score of 718. Borrowers that took out a loan for a used car, however, had an average credit score of 657.
In general, lenders look for candidates with higher credit scores since it’s less of a risk for them. Still, a lower credit score doesn’t mean it’s impossible to get your hands on a loan. There are several ways to fix your credit report and get your score back up.
Average Car Loan Interest Rates Based on Credit Score
Did you know that lenders use your credit score for more than determining your eligibility for the cash advance? Credit scores are also used to establish the average car loan interest rate.
We listed the average interest rates for each credit score ranking:
- Deep Subprime (300-500) – borrowers with this score can expect an average interest rate of 13.97%. The average loan amount is $28,991 and the monthly payment is set at $562.
- Subprime (501-600) – the average interest rate here is 11.33%. Borrowers can take out an average loan of $32,284, which comes with monthly payments of $579.
- Nonprime (601-660) – if this is your credit’s ranking, you’ll endure around a 7.14% interest rate. Moreover, the average loan would be $36,912 with a $591 monthly rate.
- Prime (661-780) – the interest rate in this credit tier ranges at approximately 4.21%. On average, borrowers can get $37,866 and the monthly payment rate is $574.
- Super prime (781-850) – the highest credit level comes with a 3.24% interest rate on average. The standard loan amount is set at $33,690 and comes with monthly payments of $541.
What Score Do Lenders Use for Car Loans?
General credit scores, whether they’re calculated by FICO or VantageScore, range from 300 to 850 points. However, since you’re specifically looking for a car loan, they might also look into your auto-specific credit score—your FICO Auto Score. FICO determines this score by calculating your traditional credit score then adjusting it depending on auto risks. Unlike general credit scores, auto credit scores range between 250 to 900 points.
Is an Auto Loan with Bad Credit Possible?
The short answer is yes. Although having good credit always makes the process easier, getting an auto loan with credit below the prime range is still possible.
First of all, remember that the car dealer’s end goal is to sell you a vehicle. Therefore, they should be willing to work with you, even if your credit is less than stellar. Nevertheless, you should try to actively take steps to improve your credit score. You can also look for title loans that target borrowers with poor credit.
It’s important to note that lenders don’t look into your credit solely to determine your eligibility. Additionally, it impacts the maximum amount you’re offered, the interest rate that goes along with it, and the repayment term. In other words, the lower your credit score is—the higher the APR and monthly payments are.
How to Improve Your Odds Before Applying for an Auto Loan
Before you apply for an auto loan, there are a few steps you can take to improve your chances of getting approved. From doing your due diligence to boosting your credit score to saving up for a down payment, there are many steps you could take.
We listed five ways you can improve your odds of getting approved:
- Check your credit – your first step must be figuring out what your credit score actually is. There are several online platforms, like FICO, that will calculate your credit score for free. With the credit report, you’ll have an in-depth overview of your score, payment history, etc. Then, if your credit lies below the prime ranking, you can start the work to boost it.
- Boost your credit score – by improving your poor credit score, you’re one step closer to getting a good loan with a lower interest rate and reasonable repayment term. Additionally, a good credit score could make a huge difference in the vehicle you’re able to buy. Make sure to focus on your unpaid bills and remaining debt, as they are the most crucial aspects of your credit.
- Prove you’re financially stable – in addition to your credit score, the lender will also look at other aspects of your finances. These include your income, job status, employment relationship, living address, etc. By doing this due diligence, the lender can ensure you’re not a risky client.
- Save up for a down payment – being able to make a down payment will likely increase your odds of getting approved for an auto loan. This way, you show the lenders you’re responsible and able to manage your money. Moreover, a down payment decreases the amount you’re looking to borrow. This will, in turn, result in lower interest rates and monthly payments and a shorter repayment term.
- Consider getting a co-signer – adding a co-signer to your loan has proven to help many potential borrowers get approved. Consider asking a relative or a friend with a good credit score to co-sign with you. This way, you’ll easily qualify for a better loan offer than you would on your own. The benefits include larger amount opportunities, lower interest rates, and more reasonable repayment terms and monthly payments. Don’t forget that once they co-sign the loan with you, their credit scores are at risk if you can’t make the payments.
Pre-approved Auto Loans
Getting a pre-approved auto loan is ultimately in your best interest. Not only does it guarantee an advance to pay with, but it can also be a great bargaining chip. This way, the dealer will know you’re serious about purchasing the vehicle and will want to make the sale.
Furthermore, with a pre-approved loan, you get more freedom to focus on the vehicle you want. Since you already know how much you can spend, you can look for cars that fall within your price range.
Shop Around to Find the Best Car Loan
The rates and key terms on auto loans can vary depending on the lender. Thus, just like with any other major purchase, make sure to weigh in all your options to find the right deal for you.
The simplest way to do this is by getting quotes from several lenders and comparing them. Depending on your situation, you decide how you want to retrieve this information—whether it’s through online lenders, your bank, the car dealership, or credit unions. Note that the car dealer may charge you a higher interest rate for arranging it.
It is important to remember that shopping around for an auto loan will likely result in several hard inquiries on your credit score. Typically, multiple frequent inquiries can negatively impact your credit. However, particularly with auto loans, all inquiries can be counted as a single inquiry if you shop for these rates within a 14-day period.
Get a Car Loan with MoneyZap
The easiest and fastest way to get an auto loan is by using our MoneyZap service. We have a massive network of lenders and a simple application process. Once you apply for a car loan online, we will match you with lenders that meet your criteria and operate in your state. You get to choose the best option and receive the money as fast as possible directly to your bank account. Our lending partners have fair lending policies and provide you with all the necessary details before you sign the e-agreement.
Commonly Asked Questions
Can I get a car loan with a credit score of 500?
Yes, getting an auto loan even if your credit score is in the deep subprime ranking is possible. However, the costs will be more significant—the lower your credit score is, the stricter the loan terms are. Research shows that borrowers with deep subprime credit endure average interest rates of 13.97%, as opposed to those in the prime ranking, which is around 4.21%.
What is a decent credit score needed to buy a car?
Typically, lenders look for potential clients buying a car with credit scores in the prime range. As a result, you would need a credit score of at least 661 or higher to be eligible for most auto loans. Even then, most of these borrowers get a used vehicle. If you’re looking for a brand-new car, you would need a credit score of at least 700. Still, don’t lose hope, as many lenders work with borrowers with lower credit scores. Plus, you can always take steps to boost your credit.
What credit score is too low for a car loan?
There is no set minimum credit score for car loan applications or approvals. Yet, a recent study showed that 30% of used car cash advances went to borrowers with subprime credit scores. Moreover, only 4.5% of borrowers had credit scores lower than 500. So, any score in the deep subprime credit range would put you in a difficult position when applying for a loan.
How do my credit scores affect my car loan?
Aside from dictating your eligibility, credit scores also impact the loan offer itself. More specifically, your credit score will also severely influence the loan terms and interest rate. As credit scores decrease, interest and monthly payments increase. Conversely, as credit scores increase, interest and monthly payments decrease.