What Is Considered Good And Bad Credit
There is no definitive point scale where there is a clear and well-defined demarcation between credit ranges. What weve gathered below are simply trends in the credit industry.
What one industry considers to be a good credit score, may be considered excellent by one, but only fair by another. So take the following ranges with a grain of salt:
- Excellent Credit 750-850
- Poor Credit: 551-649
- Bad Credit: 300-550
So now the question begs to be asked, what kind of score do car dealerships want? Here again, the answer is not quite as simple as you would probably like.
Auto lenders have access to their own FICO scoring report that predicts the likelihood that you would default on an auto loan. Not only is it separate from the other three credit bureaus, but the range is different as well .
So does this mean you shouldnt worry about what your credit scores are on the other reports?
Absolutely not. Much of the information is repeated throughout all reports, so an error on one is likely to be an error on another.
Better Credit Better Loan
A credit score in the mid-600s is considered average for a car loan and will result in mediocre loan terms. Credit scores between 680 and 720 are considered to be good. A credit score above 720 is considered excellent and will result in a low-interest car loan.
The credit score range you fall into can tell you a lot about the car loan offers you can expect to get. Naturally, the higher your credit score, the better the loan term/rate you should expect to receive. Everyone wants access to low-interest rates, low monthly payments, and larger loans. The higher your credit score, the easier it will be to get these ideal loan offers. In addition, a higher credit score will allow you to get approved quickly and easily.
But, just because you can access lucrative offers, doesn’t mean you should automatically accept them. It is still important to consider your current financial position and future financial goals. Having a great credit score leads to better deals, just don’t let that stop you from making a smart and educated financial decision.
Don’t Overthink Your Credit Scores
While your credit scores can be important, there are three reasons that it makes more sense to focus on general healthy credit habits rather than a specific score:
Building a positive credit history can help increase all your credit scores, and you won’t need to worry about which score the lender uses.
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What Credit Score Do You Need To Get A Car Loan
Think you dont have a good enough credit score for a car loan? You might be pleasantly surprised. Car dealerships arent shy about their desire to sell you a shiny new ride, even if your credit score is on the low side. You might end up with a higher interest rate on your car loan than average but you can always refinance it later onafter the loan helps you build your credit score. Heres a quick look at everything you need to know about credit scores and applying for a car loan.
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Can I Get A Car Loan With A Credit Score Of 600
You can certainly get a car loan with a credit score of 600, which is considered subprime. However, youll probably have a tougher time getting approved for a loan with a favorable interest rate. According to ExperianTM, the average interest rate for a new car from a borrower with a deep subprime credit score in 2019 was 14.3%.
For new cars from a borrower with a super-prime credit score , the average interest rate was 4.01%. As you can see, those with low credit scores were paying more than 10% on their car loans.
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What Is A Credit Score
Auto lenders evaluate an applicants creditworthiness based largely on their FICO score. Created and curated by the Fair Isaac Corp., FICO says its scores which range from 300 to 850 are used by 90% of the nations top lenders.
According to FICO, consumers with scores in the 700-850 range are considered the most reliable borrowers. They get the lowest interest rates and the most favorable loan terms. On the other end of the spectrum, borrowers with scores below 669 are often considered subprime. That means theyll pay more to finance a car.
Though the FICO score is the one used by most lenders, some use a credit score known as the VantageScore, which also uses a scale ranging from 300 to 850.
Average Interest Rates Based On Credit Score Range
Your credit score will not only determine whether you get approved for a loan, but it may also be used to establish your interest rate. The following are the average interest rates, monthly payments and loan amounts for consumers in different score ranges as of the second quarter of 2020.
While the actual interest rate and monthly payment you receive may be based on more than just your credit score range, these figures may help you in comparing any loan offers you receive as you shop for a new car.
|Average Interest Rate, Monthly Payment and Loan Amount by Score Tier|
Source: Experian State of the Automotive Finance Market, Q2 2020. Data applies to purchases of new vehicles.
What Is A Fico Auto Score
Its smart to have some idea what dealers will see when they check your credit profile by checking your credit score. Chances are, however, that your dealer might use a FICO automotive score instead of a traditional FICO score or VantageScore.
Your FICO auto score is a specialty score ranging from 250 to 900 that weighs past car-loan payments more heavily than the traditional FICO score does. It also gives more weight to any repossessions or auto-loan bankruptcies you might have previously filed. To check your automotive score, you can buy a full set of FICO scores at myFICO.com and then cancel the service rather than pay the fairly steep monthly fee.
What Is The Minimum Score Needed To Buy A Car
When lenders review your auto loan application, they look at your income and credit score. Lenders divide customers into categories based on their scores, such as:
- Super prime: 781 to 850
- Prime: 661 to 780
- Subprime: 501 to 600
- Deep subprime: 300 to 500
In general, lenders look for borrowers in the prime range or better, so you will need a score of 661 or higher to qualify for most conventional car loans.
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How Your Credit Score Affects The Cost Of A Car Loan
Just because you can get an auto loan with a low credit score doesn’t mean that it’s always a good financial move to do so. Whether or not it’s a good decision depends on your unique situation.
For starters, lenders tend to offer significantly higher interest rates to subprime and deep-subprime borrowers. This can make a car far more expensive than its sticker price might lead you to believe. Here’s a look at the national average auto loan APRs as of Dec. 11, 2018:
|FICO® Score Range||60-Month New Auto Loan APR||48-Month New Auto Loan APR||48-Month Used Auto Loan APR|
Here’s what this means to you.
Let’s say that you want to buy a new car. You want to obtain a $30,000 loan to do it.
In this example:
- If you have a FICO® Score of 720 or higher: You will likely pay a $560 monthly payment. That’s $3,574 in interest over a 60-month car loan.
- If you have a 675 FICO® Score: Your payment would likely be closer to $610. That’s $6,611 in interest alone over the life of the loan — you’d pay $3,000 more in interest than a top-tier borrower.
- If your FICO® Score is 600: You’d probably pay $728 per month. That’s $13,673 in total interest — for the exact same car.
In this case, the difference between fair and good credit scores could literally mean more than $10,000 in additional interest.
Is There A Minimum Credit Score Needed To Buy A Car
Lets look back at the minimum credit score you can have to buy a car. Keep in mind, If you have enough saved to buy the car with cash, you dont need a loan, and your credit score wont come into play. You only need a minimum credit score to buy a car when you finance the purchase.
Above, we mentioned that borrowers who have low credit fall into a category called subprime. Subprime auto loan borrowers typically need a minimum credit score of 500. With a score of 450 or above, theres a chance you could get a deep subprime loan, but the interest rate may be so high that youre better off skipping the car purchase for now if you can.
If you can patiently build your credit score to at least 660 or slowly save up a larger fund to buy a car, youll have an easier time buying a car and making the payments than if you were to get a subprime or deep subprime car loan.
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Shopping Around For A Car Loan Can Help
Perhaps the most important suggestion I can give you, especially if you have so-so credit, is to shop around for your next car loan. You may be surprised at the dramatic difference in offers you get.
Many people make the mistake of accepting the first loan offer they get . It’s also a smart idea to get a pre-approval from your bank as well as from a couple of other lenders. Online lenders and credit unions tend to be excellent sources for low-cost loan options. Not only are you likely to find the cheapest rate this way, but you’ll then have a pre-approval letter to take to the dealership with you.
The best part is that applying for a few auto loans won’t hurt your credit. The FICO credit scoring formula specifically allows for rate shopping. All inquiries for an auto loan or mortgage that occur within a 45-day period are treated as a single inquiry for scoring purposes. In other words, whether you apply for one car loan or 10, it will have the exact same impact on your credit score.
Other Factors That Can Help You Qualify For A Car Loan
Weve already gone over some factors: purchasing a less expensive car, having a large down payment, getting a preapproval and having a cosigner. Here are other things that you could provide a lender to show that youre financially stable and able to repay a car loan.
- Proof of income : Pay stubs are typically an easy way to prove your income. If your employer dont provide them or you have income from other sources, such as child support, alimony or a pension, you could provide three to six months of bank statements.
- Proof of residence : Paperwork showing your name and your address can satisfactorily prove where you live: utility bills, cell phone bills, mortgage or lease agreement.
- References: By providing references, youre giving the lender a list of people they can contact if you stop making payments. This can be seen as useful if you move frequently.
Above all, talk to the lender. Talk to a customer representative and ask what you can do to get approved or to get a better interest rate. They may be able to provide a clear answer, such as saying that you need $300 more on your down payment.
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You Can Get A Car Loan With A Low Credit Score
To be clear, you can get a car loan with a low credit score. Although the subprime mortgage market has virtually disappeared since the financial crisis about a decade ago, the subprime auto loan market has exploded in recent years. Roughly 1 of every 4 car loans made in the U.S. is made to a subprime or deep-subprime borrower.
While the exact definitions of these terms vary depending on who you ask, the Consumer Financial Protection Bureau, or CFPB, defines subprime as borrowers with credit scores of below 620 and deep subprime as borrowers with scores below 580.
A Car Loan Will Also Help Your Score
Its worth noting that once you are finally approved for a car loan, you can leverage it to build your score even more.
The biggest influence on your credit score is your payment history. When you make your car payment on time every month, your lender will report it to the three major credit bureaus .
Car loans also boost your score by helping with your credit mix. If the only type of credit you currently have is credit cards , adding an installment loan will help improve your score.
As you continue to strengthen your credit, it may make sense to refinance your auto loan in the future when you qualify for better rates.
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Does Credit Score Matter Differently If Buying A New Vs Used Car
Whether youre buying a brand new car or a used car, your credit score will have a similar impact. Loans for new cars sometimes have better interest rates than used cars, but a borrower with good credit will typically get a good interest rate regardless of the type of car they choose.
For example, according to Experian, borrowers with a credit score around 700 would pay about 4.68% for a new car compared to 6.04% for a used car.
If you buy a reasonable, reliable used car with a slightly higher interest rate, youll still probably save a bundle compared to buying a brand new car with a lower interest rate. New cars cost more than used cars and lose most of their value when you drive them off the lot. Even with higher interest rates, buying a used car is typically a better financial decision.
In either case, you are usually better off buying a car with a loan than choosing a car lease. With a lease, you are effectively renting the car and have to give it back and the end of the lease unless youre willing to make a big payment to buy it outright. When you buy with a loan, you own the car at the end and can choose to sell it or keep it for years to come.
How Much Am I Willing To Pay Each Month
The monthly payment is the amount that you need to be willing and able to pay each month out of your budget. Its an important calculation because it will determine how much you end up paying for your car overall, including interest charges. Car dealerships often use this figure as a selling point when trying to make a sale the lower the monthly payment, the better. However, some car loans offer low monthly payments by attaching an unusually high-interest rate to the loan which just means that you will pay more for your car in the long run.
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What Do Lenders Look For In A Credit Score
In short, lenders want to get paid. The dealership or the bank or credit union are trying to assess the likelihood that you will be able to pay them back. They do this by performing a risk assessment based on your credit history and your current finances, largely informed by your FICO credit score. This score is based on information from your credit report and your current monthly payment plan of any existing credit sources. Five main components comprise your credit score, each with a different associated weight.
Waiting Isnt A Bad Idea
Waiting to take out an auto loan allows you to:
Hunt for better deals and discounts.
Spend time building your credit score.
Build up a solid history of on-time bill payments.
Save more money for a down payment.
All of these actions will help you secure a more affordable loan.
While you are waiting, avoid applying for any other forms of credit. If hard inquiries are made on your account, your score will take a temporary hit.
Lastly, when the day finally comes to buy your ride, go for a used car, keep the financing term to a maximum of four years, and put down as big of a down payment as possible .
Doing so will minimize your interest payments and help you avoid negative equity .
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How To Reduce Your Auto Loan Interest Rate
Improving your credit score is one of the best ways to score a lower auto loan interest rate. You can do that by checking your and to get an idea of which areas you need to address.
Common ways to improve your credit score include getting caught up on past-due payments, paying down credit card debt, limiting new credit applications and disputing inaccurate information on your credit report.
As you work on building your credit, here are some other ways you may be able to reduce your auto rate:
Consider each of these options and determine the right ones based on your situation, goals and abilities.