Back to GuidesAs a car buyer, you should aim for a minimum credit score of 660 prior to applying for a car loan, experts say. Since 660 is better than the average credit score, applicants with a score this high or higher are nearly guaranteed better rates on their auto loans than those borrowers with lower scores.
When it comes to auto financing, your credit score plays a huge role in whether you get approved for the car that you want to buy. But approvals aside, your credit score also makes a big difference in how much you will ultimately pay for the vehicle you choose since the best interest rates are reserved for buyers who have the best credit.
People with mediocre and even poor credit get approved for auto loans all the time, but generally under very unattractive auto loan rates that end up costing them thousands of additional dollars in the long run. Here's a look at what credit score you need to buy a car, and how your credit affects your purchase and loan rates.
Your Credit Score
Your credit score is a numerical value that lenders use to predict your creditworthiness. Credit scores range from a minimum credit score of 300 on the low end, which indicates poor or non-existent credit, to 850 on the high end, a denotation of excellent credit. Most people fall somewhere in between those two ranges.
Credit reporting agencies, including the top three (Experience, Transunion and Equifax), assign your credit score based on individual scoring models. Your payment history, length of positive credit history, age of accounts, and the debt-to-credit ratio all play into the numbers game that these credit reporting agencies use to determine your score.
When an auto loan company pulls your credit report, they can see your score and your credit history. They use the info from your report to determine the level of risk they assume when they loan you money to buy a car.
When you hear the term credit score, you typically hear about your FICO score, which is called that because the Fair, Isaac and Company developed it. Auto financing companies usually rely on FICO Auto Score or a newer scoring method known as VantageScore when determining an applicant's suitability for a car loan.
Each credit reporting model has its own names for credit score ranges.
For example, Experian, a major credit reporting bureau, uses ranges from Deep Subprime to Super Prime to describe creditworthiness.
Credit Score Categories:
Deep Subprime. If your credit score falls between 300 and 500, Experian ranks it as Deep Subprime. Most traditional lenders reject Deep Subprime borrowers; those who accept them will charge them very exorbitant interest rates as a hedge against the risk these borrowers pose should they default on their auto loans. In many instances, Deep Subprime borrowers will be required to make hefty down payments and large monthly payments to balance out the risk represented by their low credit scores.
Subprime. A little further up the ladder in the credit score game is the Subprime score, which falls between 501 and 600. Although it's easier for Subprime borrowers to find financing, it will still be a costly proposition. Again, higher interest rates are the norm for bad credit borrowers, which is essentially what subprime means. Experian notes that even though the payments on Subprime loans are higher than most car loans, the loans are smaller than average, an indicator that these borrowers are paying a lot of money over the short term for a less expensive vehicle or that they put large down payments down to secure a car loan.
Nonprime. If your credit score falls in the 601 to 660 range, you are considered a Nonprime borrower. Around 20 percent of borrowers taking out car loans fall in this category. The Nonprime borrower doesn't get the best possible interest rates, nor do they qualify for automaker-sponsored financial specials. And whereas a Subprime borrower may have to settle for a used car loan, most Nonprime borrowers can be approved for a new car loan.
Prime. A credit score from 661 to 780 makes you a Prime borrower, a distinction held by around 40 percent of Americans. Prime borrowers can usually get lower interest rates and (sometimes) special automaker-sponsored financing. Most lenders will approve Prime borrowers because they consider them to have good credit. For this reason, they can usually shop around and find the best deals on the vehicles they want instead of paying more because of limited financing options.
Super Prime. The most coveted of all classifications, Super Prime borrowers have credit scores that range from 781 to 850. They get the best rates and can essentially pick and choose from multiple loan offers from a variety of sources. Lenders, including banks, credit unions, and even the automakers themselves, see them as responsible and likely to hold up to their loans' terms, so there is minimal risk involved in writing a loan for the Super Prime borrower. The lowest rates are reserved for these borrowers.
Keep in mind if you fall into the Deep Subprime, Subprime, or even Prime categories, there are many unscrupulous lenders and dealerships out there that take advantage of people who are desperate for financing. It may be a good idea to improve your credit before taking out an auto loan, especially if you are teetering between Nonprime and Prime or Prime and Super Prime. Just a slight improvement when you're on the ledge between the two can save you a lot when it comes to the high interest rates you'll pay on your over the life of the loan.
How Much Difference Does Your Credit Score Make?
You'd be surprised by the difference that just a few percentage points can make when you're looking at not only the overall cost of purchasing a vehicle but also at how much your monthly payment is on your purchase. Much of what bad credit borrowers pay each month is payment on the interest on the loan, not the principal (which is the actual loan amount borrowed).
For example, if your lower credit score falls into the Deep Subprime category, and the current interest rate is 14.93% for borrowers of your classification, you will pay $36,700 for a vehicle that sells for $25,000 when you take into account the interest charges and down payment. Your monthly payment on a 60-month loan would be $475.
If you buy the same car with a Nonprime credit score, your interest rate falls to 7.55%, and the car ends up costing you $30,580, payable $390 per month over the loan term of 72 months.
For the Super Prime borrower, the same car costs just $27,484. That takes into account a 3.47% interest rate. Car payments for this borrower fall to $347 monthly.
Checking Your Credit
As you can see, it is vital to get your credit in the best shape possible before venturing out on your car buying journey. Checking your credit score with all three credit bureaus (Equifax, TransUnion, and Experian) before you set out on your search is a savvy move. You can request your credit report from any of the bureaus; under U.S. law, you are entitled to one free credit report from each of the main three bureaus each year via AnnualCreditReport.com. However, the free credit report usually does not give you access to your actual credit score. Nonetheless, it can be an excellent tool to help you assess your credit health and determine areas that you can improve upon before applying for an auto loan.
Pulling your credit report can also help you determine the accuracy of what's reported about your credit performance. Mistakes on your credit report often negatively impact your score, so it's essential to check it regularly to make sure that no inaccuracies are reported. If you find something reported in error, file a dispute with the credit reporting agency immediately. According to the Federal Trade Commission, nearly one-third of consumers in a study found a substantial mistake on their credit records upon examination.
Improving Your Credit Before Buying a Car
If you have good or excellent credit, you're in good shape to go car shopping. However, if you're like the millions of Americans who are struggling to build or rebuild credit (and you can wait to get a car later on), you should begin taking steps to improve your credit.
Some of these include:
Continue steady repayment of existing debt, particularly credit cards that have higher interest rates. Paying credit cards and revolving lines of credit down to one-third of the available credit line shows lenders that you are a responsible borrower.
Continue to make on-time payments on all existing accounts. Creditors want to see that you're reliable when it comes to paying your obligations. If you're going to be late with a payment, reach out to your creditor to make arrangements to pay rather than merely paying late.
Keep balances to a minimum. In doing so, you show that you're able to manage your spending habits, which is a hallmark of a responsible borrower.
Pay off debts when possible. Paying off debt reduces your overall credit-to-debt ratio, which can help your credit score over time. It also shows the lender that you have the disposable income to repay your loan when you have fewer obligations to pay.
Avoid applying for new credit. Each time you apply for a loan or credit card, an inquiry notation is made on your credit file. Creditors want to see minimal inquiries.
Don't exceed your credit limit.
Don't close accounts, even if you no longer need or want them. The age of the accounts on your credit file lets creditors see that you can keep accounts open and in good standing over time.
Keep credit utilization in line. Avoid using more than 30 percent of your available credit. Having credit available but choosing not to use it positions you as a buyer capable of managing your finances. By contrast, maxing out every possible source of credit makes it look as if you are having financial problems or that you can't control your credit.
If you have minimal credit accounts, open a secured credit card account. Your own deposit and works back this type of account in most ways like a traditional credit card. The card issuer reports your "credit performance" just like a regular credit card, so you can benefit from having on-time payments and a minimal balance, just like you would from a traditional card.
Buying a Car With Less-Than-Perfect Credit
If you need a new vehicle now and have bad credit, all is not lost. Many creditors are willing to write auto loans for people with bad credit since the car itself usually serves as collateral to secure the loan. If you fail to make your payments as agreed, the lender has the option to repo the car and resell it. While this doesn't reduce all of a lender's risk, it does make auto loans less risky than some other types of loans.
But remember, it's not all butterflies and kittens in the subprime auto lenders sector. As mentioned above, you should brace yourself to pay more overall for your car when dealing with lenders who finance bad credit borrowers. You should also expect to pay a substantial down payment, which lenders generally require to secure financing. Also, your monthly payment will be higher, so budget accordingly so that you don't "buy more car" than you can reasonably afford.
You might also consider getting a co-signer to help you secure a loan. A co-signer essentially agrees to make your payments if you cannot. Having a creditworthy co-signer on your loan application can expedite your car purchase and help you get cheaper interest rates.
On another note, if you take out an auto loan with bad credit, you will likely also pay more to insure the car than you would if you have good credit, according to State Farm. Insurance companies determine rates based on statistics, and non-creditworthy borrowers tend to file more car insurance claims than their creditworthy peers. Charging bad credit drivers more than drivers with good credit is prohibited in some states, but not all.
Bottom Line
buying a car with a good credit score is superior to buying one with a bad credit score. In the state of the automotive finance market in 2021, if you need a car and you have bad credit, you may be forced to bite the bullet and pay the added penalties that go hand-in-hand with your credit situation. Bear in mind, however, that auto financing companies also report to the major bureaus. You can easily use your bad credit loan for a car as a stepping stone to building better credit in the future, possibly even improving your credit score enough to apply for refinancing of your car loan to a better, lower interest rate later on down the line.
