What Credit Score is Needed to Buy a Car?
Americans have an undying love of automobiles and the sense of freedom they offer. Purchasing a new car or a reliable pre-owned model allows you to travel to favorite restaurants, social events, or just take a weekend road trip anywhere you desire. Cars, trucks, and SUVs equal freedom, and having the right credit score puts you in the driver’s seat.
But automobile shoppers wonder what credit score is needed to buy a car. As you walk a dealership lot considering your next ride, it may be prudent to review your credit score and elevate it as much as possible before applying for a car loan. You may be pleasantly surprised to discover that mid-range credit scores can put you behind the wheel. But lower scores typically mean you will pay more over the life of the loan.
How Does Your Credit Score Affect Your Car Payment?
The fundamentals of securing a car loan are relatively simple to understand. Low credit scores result in consumers generally paying higher interest rates and higher monthly loan payments. High credit scores usually create opportunities to qualify for low-interest auto loans with lower monthly loan payments. But if securing a car loan were that simple, people wouldn’t continue to think about what credit score is needed to buy a car. The following 2021 data released by Experian highlights the complex correlation between approved auto loans and credit scores.
- The average credit score for used-car buyers or leases was 665.
- The average credit score used to secure a new car loan was 732.
- Almost two-thirds of financed automobiles involved a credit score of 661 or higher.
- One-third of auto loans were approved with a credit score between 501 and 600.
- Only 2 percent of auto loans involved a credit score under 500.
It’s important to keep in mind that a local lender may consider other positive factors that can help offset a low credit score. But low scores usually lead to higher interest rates and borrowers paying more than they might otherwise if they improved that three-digit number. Consider the following scenarios or estimate your situation by using a car loan calculator.
A couple decides to give their child a late-model family vehicle as they head off to college. The parent with the highest credit score falls into the prime 700s and qualifies for an interest rate of 5.5 percent, employing a down payment of $5,000, for a 60-month loan. After some light haggling with the salesperson, they agree on a price of $30,000.
- Based on those numbers, the new family automobile involves a $477.53 monthly payment, $3,651.80 total interest paid, with the total vehicle cost tallying $33,651.80.
Let’s rerun those same numbers based on a subprime credit score of 550, which generally pegs new car loan interest rates at about 9.5 percent. Under the lower credit score scenario, the family with a college-bound child incurs the following costs.
- The monthly payment rises to $525.05, with the total interest at $6,503.00, and the total cost of the new family vehicle tallying $36,503.00.
That working family would lose $47.52 each month, $570.24 annually, and $2,851.20 over the life of the loan. Given they probably need money to help their child complete a college degree, that money would have been better served staying with the family.
What Credit Score Is Needed to Buy a Car?
When discussing credit scores concerning car loans, lending professionals generally understand the ranges along the following lines.
- Superprime: 781-850
- Prime: 661-780
- Nonprime: 601-660
- Subprime: 501-600
- Deep Subprime: 300-500
These scores are typically generated from one of the three major credit bureaus — Equifax, Experian, and TransUnion. Each calculates your creditworthiness based on impartial financial data using the FICO system to calculate a figure from 300 to 850. These factors include repayment consistency, credit utilization, a mix of loan products and lines of credit, the age of your accounts, and how often a hard inquiry has been made regarding your report.
Hard inquiries are made by lenders when people apply for new credit cards, personal loans, and other types of borrowing. Keep in mind, that the terms credit score and FICO score are generally interchangeable.
The three credit organizations may assign different credit score numbers because they review different information. A car loan professional may rely on one reporting agency, a mix, or consider an average of the three. Many local lenders use their discretion and best judgment when processing car loans for community members. That being said, the reporting industry has evolved in recent years and specialized auto loan FICO scores are now available.
To discover how to build or improve your credit score, download our free guide:
What is a FICO® Auto Score?
An increased number of dealers rely on the FICO® Auto Score over traditional reporting. A FICO Auto Score ranges from as low as 250 to as high as 900 and more heavily weighs previous car loan repayment histories over other elements.
For example, a repossession or an auto-related bankruptcy could result in a FICO Auto Score that is significantly lower than a general credit score. Of course, consistently paying a previous car loan when other bills fell slightly behind could make it advantageous to use a FICO Auto Score. If you’re shopping for a new or pre-owned vehicle, knowing all of your scores may prove useful.
How to Increase Your Credit Score Before Buying a Car
We’ve essentially answered the question about what credit score is needed to buy a car. The next step is crafting a strategy to improve your credit score quickly and efficiently.
Because the FICO score system uses specific metrics, consumers can address issues that negatively affect the three-digit number. One of the simplest ways to quickly improve a credit score revolves around credit utilization. By paying off credit card balances and reducing an available line of credit to under 50 percent, a FICO score typically ticks up month-over-month.
Other techniques include securing a free copy of your credit report and scrutinizing it carefully. If you discover any errors or commitments that should have timed out, contact the reporting agency and have the correction made. The following common-sense approaches to responsible financial management can also help.
- Pay Monthly Bills on Time
- Avoid Checking Account Overdraft Issues
- Avoid Hard Credit Inquiries
Although it’s a good idea not to close credit card accounts when shopping for an automobile, paying off balances can demonstrate lower credit utilization and better financial management.
Other Ways to Buy a Car with Bad Credit
Although only 2 percent of people reportedly secured a car loan with subprime credit, determined community members may qualify. One of the ways responsible people navigate bad credit is by bringing a sizable down payment to the process. Cash is king — as they say — and larger down payments help mitigate a lender’s risk.
Perhaps the best way to overcome a low credit score is to pre-qualify for an auto loan with a local lender who is more willing to work with community members while viewing the entire financial picture versus just one application.
If you are ready to buy a new or used vehicle, apply online or get pre-approved for your auto loan with Allegiance Credit Union. If you have questions about your financial situation, please contact a loan officer today.