Imagine you've been eyeing that sleek, new sedan at your local dealership. You've saved up for the down payment and are ready to purchase. But there's one crucial factor that could significantly impact your buying experience: your credit score.

Lenders use your credit score to gauge the risk of lending to you, influencing whether you're approved for an auto loan and the interest rate you'll get. Generally, a credit score of 660 or above is ideal for securing more favorable loan terms for your car purchase.

Ultimately, understanding the credit score needed in car purchases and how it affects your ability to buy a car can help you confidently navigate this significant financial decision.

What Is a Credit Score?

Your credit score is more than just a number; it reflects your financial responsibility. It's calculated based on information from your credit reports, including your payment history, the amount of debt you have, the length of your credit history, credit mix and new credit.

When you purchase a car, your credit score is a key factor in determining the risk lenders will take on if they lend you money. Having a high credit score means you're a low-risk borrower, which can lead to more favorable loan terms, such as larger loan amounts. Conversely, a poor credit score indicates you're high risk, which can result in less favorable loan terms like higher interest rates or a larger down payment requirement.

What Is the Minimum Score Needed to Buy a Car?

While there's no one-size-fits-all credit score required to buy a car, lenders have their own criteria when reviewing your application. As a rule of thumb, the higher your credit score, the better your chances of securing a lower interest rate and more flexible repayment terms.

According to Experian's State of the Automotive Finance Market report for the first quarter of 2023, borrowers are classified into the following categories based on their credit scores:

  • Super Prime: 781–850
  • Prime: 661–780
  • Non-Prime: 601–660
  • Subprime: 501–600
  • Deep Subprime: 300–500

The report showed that the average credit score for a new car loan is 742. Prime borrowers comprised 66% of the total financing for new and used vehicles, while Subprime borrowers accounted for roughly 16%.

Generally, most lenders consider a credit score of 660 or above ideal. However, it's important to note that while a higher credit score can lead to more favorable loan terms, it's not the only factor lenders consider. They also look at your income, employment stability and debt-to-income ratio.

What Credit Scores Do Auto Lenders Use?

When you apply for an auto loan, lenders may use a specific type of credit score known as an auto score. This is a variation of the traditional FICO score, specifically designed to predict the likelihood of you repaying an auto loan on time.

The FICO Auto Score uses a range of 250 to 900, which is different from the standard FICO score range of 300 to 850. The auto score gives more weight to how you've managed previous auto loans. For instance, if you've had an auto loan in the past and made all your payments on time, this could positively impact your auto score.

In addition to the FICO Auto Score, some lenders might use the VantageScore, another type of credit score developed by the three major credit bureaus: Experian, Equifax and TransUnion. It uses a slightly different model but serves the same purpose: to predict credit risk.

How Credit Scores Affect Auto Loans

Your credit score plays a significant role in the car loan process, affecting not only your ability to secure a loan but also the terms and conditions of the loan. Having a good credit score can offer several benefits, including:

  • Lower interest rates: A good credit score can qualify you for lower interest rates, reducing the overall cost of your car loan. This means you'll pay less for your car over the life of the loan.

  • Higher loan amounts: Lenders are more likely to offer larger loan amounts to borrowers with good credit scores, giving you more options when shopping for a car.

  • More negotiating power: A good credit score can give you more leverage when negotiating the terms of your loan. You might be able to secure a longer repayment period, a lower down payment or other favorable terms.

How to Buy a Car With Bad Credit

Lenders may see you as a higher risk if you have a lower credit score. While this doesn't mean you can't get a car loan, it can result in less favorable terms, such as higher interest rates and fees. Here are some ways to help you navigate the car-buying process with bad credit:

  • Save for a larger down payment: The more money you can put down upfront, the less you'll need to borrow. A larger down payment can reduce the lender's risk and increase your chances of loan approval. Plus, it could potentially lower your monthly payments and the overall cost of the loan.

  • Consider a cosigner: If you have a trusted friend or family member with good credit, they might be willing to co-sign your auto loan. A cosigner agrees to take on the responsibility of the loan if you can't make the payments. This can reassure the lender and increase your chances of loan approval.

  • Shop around for bad credit lenders: Different lenders have different criteria and tolerance for risk. Don't be discouraged if one lender rejects your application. Take the time to explore various lenders to find one that's willing to work with your credit situation.

  • Go for a cheaper car: Opting for a less expensive car can reduce the amount you need to borrow. This can make you a less risky borrower to lenders and increase your chances of loan approval. Plus, a cheaper car can result in lower monthly payments, making managing the loan easier.

  • Check for pre-approval: Some lenders offer pre-approval for auto loans, which can give you a better idea of what you might qualify for before you start shopping. With a pre-approval, you can set a realistic budget and avoid the disappointment of setting your heart on a car that's beyond your budget.

How to Build Your Credit Before Buying a Car

Improving your credit score before buying a car can help you secure better loan terms. Some ways to do that include paying your bills on time and reducing your debt.

  • Pay bills on time: Your payment history is a significant factor in your credit score. Consistently paying your bills on time shows lenders that you're reliable and can manage your debts responsibly. This includes not just your credit card bills but also rent, utilities and any other recurring bills.

  • Reduce your debt: The amount of debt you owe, also known as your credit utilization ratio, is another major factor in your credit score. Try to pay down existing balances and avoid taking on new debt. A lower credit utilization ratio can positively impact your credit score.

  • Keep old credit accounts open: The length of your credit history can influence your credit score. If you have older credit accounts that are in good standing, keep them open. This can help extend your credit history and improve your credit score.

  • Limit new credit applications: Each time you apply for new credit, a hard inquiry is made, which can temporarily lower your credit score. Try to limit new credit applications, especially in the months leading up to your car purchase.

  • Diversify your credit mix: Lenders like to see a mix of different types of credit, such as credit cards, mortgages or personal loans. Consider diversifying your credit mix if it makes sense for your financial situation.

  • Check your credit reports for errors: Mistakes on your credit reports can negatively impact your credit score. Regularly review your credit reports from all three credit bureaus and dispute any errors.

Improving your credit score is a process that takes time. It's best to start working on these strategies before you buy a car. With patience and consistent effort, you can improve your credit score and put yourself in a better position to secure a favorable auto loan.

Frequently Asked Questions

When it comes to buying a car, you may have concerns about the minimum credit score required to qualify for an auto loan and how it might affect your financing options. We addressed some of your commonly asked questions below.

What is a good credit score for an auto loan?
Can you get an auto loan with bad credit?
Can you buy a car with no credit history?
How does applying for an auto loan affect your credit score?
How long does it take for my credit score to improve?

About Christopher Boston

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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

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