Article Updated July 18, 2018.
If it’s time to purchase a new vehicle, you may be wondering about one obstacle that could get in your way: your credit. Maybe you’re unsure how good your credit is, and you don’t know what credit score is needed to buy a car either. It is better to educate yourself with the knowledge you need to move forward with the car buying process to help alleviate any frustration or challenges you may find along the way to car ownership.
No matter your credit score, you can probably find a way to finance a car loan if you absolutely must buy a new vehicle. The real question is what your credit score will cost you when you make the purchase. The better your credit score, the better your chances may be of receiving a cheaper and more affordable interest rate and payment per month.
So, while there’s no minimum credit score required for car loans, your credit history and credit score can definitely make a big difference in the car buying process.
Bad Credit Scores Mean Much Higher Interest Rates
According to data from Experian Automotive, the difference in interest rates on a new car loan for someone with excellent credit versus someone with very poor credit is over 11 percentage points.
In fact, 2.84% was the average interest rate someone with a super-prime (excellent) credit score paid in the first quarter of 2017, while those with deep subprime (very poor) credit paid an average interest rate of 13.98% or higher.
To illustrate this difference, consider that you apply for a 60-month loan on a car that costs $25,000. With a 2.84% interest rate, the total cost of your car would be $26,847 with payments of $447 per month. Not too shabby.
For the same loan but an interest rate of 13.98%, your car loan would cost you $34,887, and you’d pay $581 per month. That’s more than $8,000 extra! Clearly, poor credit can result in you paying a lot more for your new vehicle.
The difference was even starker in comparison to those financing used cars. Those with super-prime credit paid an average rate of 3.56%, while those with deep subprime credit paid an average of 19.62%—more than 16 percentage points higher.
Average New Car Loan Rate by Credit Score (Q1 2017)
- Super-prime (781–850): 2.84%
- Prime (661–780): 3.77%
- Nonprime (601–660): 6.60%
- Subprime (501–600): 11.05%
- Deep subprime (300–500): 13.98%
Note that the credit labels above represent Experian’s credit ranges. Other credit reporting agencies use different scales and labels so the information may differ between each credit bureau.
Experian uses a scoring model of 300 to 850. You will find the prime borrowers on the top of this spectrum, and the deep subprime borrowers are at the lower end of the spectrum.
Even if your credit score doesn’t fall into the average ranks as outlined below, you may still be able to qualify for a vehicle loan with a score of between 600 and 660.
Average Used Car Loan Rate by Credit Score (Q1 2017)
- Super-prime: 3.56%
- Prime: 5.29%
- Nonprime: 9.88%
- Subprime: 16.48%
- Deep subprime: 19.62%
The dealer may also evaluate your credit using another type of credit score called VantageScore. VantageScore, which was developed by all three of the major reporting agencies, assigns different weights to different parts of your credit history, such as on-time payments, balances, and utilization.
Some people may benefit from a lender using their VantageScore, while others may be at a disadvantage.
Subprime Auto Loans
If you find that you are ineligible for a traditional car loan because you have a low credit score or less than perfect credit, or your income is below where it needs to be, then you will need to look into a subprime auto loan.
Subprime auto loans tend to be a lot riskier than regular or traditional car loans, and they typically come attached to much higher interest rates and fees, and you are paying for much longer terms.
Subprime lending is also often referred to as near-prime, subpar, non-prime, and second-chance lending. However, instead of using this type of high interest loan, if available, you should instead improve your credit, so it is no longer less-than-perfect-credit. You could also see if you could instead qualify for in-house financing at the dealership, so you do not have to be a subprime borrower and risk putting yourself under even more financial strain.
Where to Start If You’re Unsure
If you’re nervous about letting a car dealer check your credit—but even if you aren’t—it’s helpful to check your score yourself in advance. You can check your credit report for free to make sure you don’t have any surprises and to find mistakes.
Note that the credit scores an auto lender uses may be slightly different because it will be tailored for an auto loan. Still, it’s a good start—if your general credit score is strong, you can also bet that the score the dealer uses is strong.
We also recommend that you try to get pre-approved for a car loan from a bank or credit union before setting foot in the dealership. With a set interest rate in hand, if the dealer can offer you a better rate, perfect! If not, you’ll be prepared to pay what your bank approved you for.
How to Get Pre-approved for a Car Loan
You can apply for pre-approval for a car loan easily online, in person, or even over the phone. The lender will perform a hard credit check to see the state of your credit, and they will then gather all of your financial information such as your monthly income, and they will then have a better idea about whether or not they will provide you with the car loan.
All of these factors will figure into the interest rate, monthly payment, loan amount, and even the length of the loan. There is also something called pre-qualification, but this process will not be as accurate as the pre-approval process because they are not able to take such a close look at your credit.
If and when you are pre-approved, the lender will provide you with an offer statement in the form of a letter, certificate, or another form of proof so you can take it to the car dealership of your choice and begin the car buying process.
Remember, even if you are pre-approved, you will want to set a very realistic budget for yourself prior to looking at cars so you will have a better idea of what you can afford and what you should be looking into.
Getting the Best Auto Loan
Getting the best auto loan is important when it comes to affordability and value. It is recommended that you look at options from different banks and credit unions and other online lenders to make sure you are getting the lowest possible interest rate you can get. Finding a car dealership that offers financing may also prove to be a beneficial idea as well; especially if your credit is less than ideal.
When planning to finance a new or used car, it is always best to take your time and plan it out because it is a big purchase and investment. If you are able and have the time, you should consider working on your credit score to improve your credit, so you are able to lock in a much better deal.
Pull your credit report and look through it thoroughly. Always be on the lookout for any errors so you can dispute them and get them removed. It is also important to make sure you are paying all of your bills on time, your credit balances are low, and you are not opening any new lines of credit except when you actually need to.
You will be presented with better financing options if you can show the potential lenders that you are responsible and can pay your bills on time and maintain good credit.
A Word of Caution
Credit inquiries related to auto loans made within a short time frame (usually 14 days, or 45 days depending on the credit score model being used) are supposed to count as a single inquiry. However, some of our readers have found their credit scores dropping after multiple car dealers sent credit inquiries for financing. This is another reason why getting pre-approved before going to the dealership is a good idea.
If want to make sure your credit is good enough to purchase a car, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get a free credit score updated every 14 days.
Here’s What Else You Should Know about Auto Loans: