What Credit Score is Needed to Buy a Car?
Are you in the market for a new vehicle, but uncertain if your credit score will qualify you to purchase a car?
If buying a car is a must, generally you’ll be able to find a way to finance the purchase. You may have to look at pre-owned rather than new, or settle for less than your top choice.
The bigger question at hand is what it will ultimately cost you. Your credit score is a big component to your creditworthiness for obtaining a car loan. The better your credit, the better your finance rates.
How Does Your Credit Score Rate?
Everyone is eager to get behind the wheel of a new car and go for a test drive. But before you start car shopping, you should have an idea of what your credit score is and what car loan options are available to you.
A credit score is a three-digit number that reflects how well you manage your credit. Most credit scores, such as the FICO credit scoring system, range from 300 to 850. Within that range they are categorized from bad to excellent.
Although each lender sets its own standards for a good or excellent credit rating, generally, credit scores fall along the following lines:
|Credit Score Ranges||Credit Quality||Effect on Ability to Obtain Loans|
|300-559||Very Bad||Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.|
|560-649||Bad||May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.|
|650-699||Average/Fair||Eligible for many traditional loans, but the interest rates and terms may not be the best.|
|700-749||Good||Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.|
|750-850||Excellent||Qualify easily for most loans and lines of credit with low interest rates and favorable terms.|
Minimum Credit Score for Car Loan
According to an Experian Automotive report, the average borrower for a car loan had a credit score of 711, in the 4th quarter of 2015. Although that is what most buyers had when purchasing a car, it doesn’t mean it is the minimum for a car loan approval.
In fact, the report also showed the percentage of auto loans to buyers with the poorest credit ratings is growing faster than the rest of the auto finance market. This would include those with subprime and deep subprime credit scores (619 and below). Financing for these poor credit scores does come with high interest rates, which could very well top 10% or more.
On the contrary, those with excellent credit scores (750+) may have the best luck when it comes to buying a car. They may even lock in a car loan with a 0% interest rate if that is currently offered.
Still, this does not answer the question: what is the minimum credit score needed for a car loan? Unfortunately, there is no straight answer to this. The answer very much comes down to each lender. The important takeaway, however, is there are lenders who will provide car loans to customers with poor credit, it's just important for you to know that the numbers vary from lender to lender.
Here are the credit scores required from largest U.S. auto lenders:
|Auto lender||Minimum credit score (based on anecdotal data)|
|Bank of America||600|
|Fifth Third Bank||640|
Credit Score Needed to Lease a Car
Much like auto lenders and loans, lessors also examine your credit score to determine an interest rate for your car lease. Having a higher credit allows you to obtain the best rates.
Although there is no magic number to be able to lease a car, generally those with poor credit (600 range) can expect to be approved. Subprime borrowers with bad credit scores below 640 may be asked to pay a higher down payment or a security deposit for a lease, in addition to a higher interest rate.
Even extremely low credit scores can sometimes get a lease approval at certain dealerships (below 600). To get an accurate picture of what you might expect, it would not hurt to call around to a few dealerships and ask them the likelihood that your credit score would be approved for a lease. This will also help narrow down options and save you time.
Lease terms are typically 24 to 48 months. Leasing a car may be a good option if you want lower monthly payments. Of course, you must be cautious to not go over the permitted mileage and to not create beyond normal wear and tear to the vehicle, as it can cost you more than you signed up to pay.
Car Loan Rates by Credit Score
The size and length of car loans has grown recently. According to the latest numbers by the Experian automotive report, the average car loan is $29,551. Borrowers also have longer repayment plans. The average loan term is 67 months.
Borrowers with the best credit scores or “super-prime” customers received an average car loan rate of 2.70%, during the fourth quarter of 2015. Car buyers with average credit scores saw a rate of 3.55%.
Car buyers with poor credit generally pay several times more to finance a vehicle. The average cost of subprime loans was 10.36%. Those with deep-subprime credit scores (500 and below) paid on average 13.31% in fourth quarter of 2015, according to the Experian report.
How Your Credit Score Can Affect Your Next Car Loan
|Credit Score Range||60-Month new Car Loan||40-Month Used Car Loan|
How to Improve Your Credit Score
|FICO credit score factors||Percentage weight on credit score:||What it means:|
|Payment history||35%||Your track record when it comes to making (at least) the minimum payment by the due date.|
|Amounts owed||30%||How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.|
|Length of credit history||15%||The average age of your active credit lines. Longer histories tend to show responsibility with credit.|
|Credit mix||10%||The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)|
|New credit||10%||The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.|
Now that you can see the relationship between your credit score and approval for a loan (as well as the rate you'll get on the loan), you might decide you want to improve your credit score before you buy. If that's how you feel, here's what you can do:
- Lower your credit utilization ratio
- Make all of your payments on all of your credit card and loans on time
- Keep all of your old credit cards open, even if you're not using them
The first item on the list is to lower your credit utilization ratio. In other words, pay down the balances on your debt as much as possible. Your credit utilization ratio is a ratio defined by the amount of debt you have to the amount of credit you have available to you. To get a high credit score, you want this ratio to be 30% or lower.
The second item on the list is to make sure you make all of your payments on all of your credit cards and loans on time, every single month. Payment history makes up a large portion of your score and missing one payment or paying one payment late can have an immediate impact. Even if you can't pay over the minimum, make sure you at least make all of your monthly minimums and that you do it on time.
The third step to take is more about what not to do: don't close unused credit cards. Another large portion of your credit score is based off the age of your accounts. So, although it may seem like the obvious thing to do is close a credit card you're not using, doing so reduces the age of your accounts and therefore reduces your credit score.
Do Your Homework Before You Car Shop
Once your credit score is where you need to be, you'll want to take a look at your credit report.
Experian recommends running your credit report three months before you plan on buying a car, in case there is anything that is requiring attention. Annualcreditreport.com offers one free report a year from the three major credit reporting agencies: Experian, Equifax, and Transunion.
The reason it's important to look at your credit report in addition to your score is because there could be items on the report that don't belong to you. These items could either be fraudulent or they could be mistakes, but either way you should be aware of them so you can resolve the issue. Anytime you find an error on your credit report, file that error to the reporting agency. They can clear up your report for you and then you'll be in a position to enter into new loans showing only accurate information on your report.
Search for the Best Financing Option
Even if your credit score needs some work, you’ll still want to seek approval from more than one lender. There are a large variety of lenders out there and it's important to get the absolute best interest rate you can. Even a seemingly slight difference in the interest rate can have a significant affect on the amount you pay over the life of the loan. Remember, this is a loan you'll be paying on for 12 months per year, for several years. So what might seem like a small amount of difference per month now can add up when you do this math. Set yourself up for the best scenario possible by getting the best rates you can.
While you're shopping for rates, don't forget to check with your bank. Since you already have a relationship with them, they might be more willing to approve you than others. In fact, they could possibly even offer you better rates if you set up automatic payments through your bank account. Banks are always offering special promotions and deals that people aren't always aware of, so it never hurts to ask.
Typically you can find credit applications on dealership websites and try to get pre-approved. If you fill out applications for car loans in a 14-day period, they will only count as one inquiry on your credit report. Do shop around for financing options, as it can only help you.
The Bottom Line
If you don’t have to immediately buy or lease a car, consider saving up for a few months. This can help you save money for a down payment on a car and give your credit score a boost. Experts recommend setting aside (on a monthly basis) the amount you can afford for a monthly car payment. Just be sure that you can afford to put money aside without defaulting on other payments. The goal for saving up is to have enough money for a down payment while hopefully approving your credit score to obtain a better interest rate on your car loan.