If you’re looking to buy a car, one of the first things you’ll need to consider is your credit score. Your credit score is an indication of how likely you are to repay a loan, and the higher your credit score, the more favorable your interest rate and terms will be.
In general, you’ll need a credit score of at least 600 to qualify for a traditional auto loan, but the minimum credit score required to finance a car loan varies by lender. If your credit score falls into the subprime category, you may need to look for a bad credit car loan. These typically have higher interest costs than traditional auto financing.
What is the minimum credit score needed to buy a car?
While there is no official minimum credit score required to apply for auto loans, lenders have minimum standards that they look for when reviewing your application. And, as a general rule, the lower your credit score, the more interest you will be charged.
The minimum credit scores to qualify for auto loans vary based on the lender and the car you are looking to finance. Some lenders may consider you if your credit score is below the advertised minimum if you are a current customer or can otherwise prove to them that you are a low-risk borrower.
Your credit score also won’t be the only factor used to determine your auto loan interest rate. Dealers may also evaluate your income, employment history and your debt-to-income ratio. However, your credit score will still make up a large part of the process.
How credit scores affect auto loans
A credit score is a numerical representation of how likely you are to repay a loan. The higher your credit score, the less risky you are considered and the more likely you are to receive a favorable interest rate on your loan and better terms.
Here’s a quick look at how a good credit score can benefit you when you’re buying a car.
- Lower interest rates. A good credit score — typically a score of 680 or higher — can help you secure a low interest rate from the dealer. In fact, taking your score from 600 to 780 could halve your rate.
- Lower monthly payments. The lower interest rate can help you get a lower monthly car payment, potentially leaving room in your budget for other financial priorities.
- Lower down payment. A good credit score may also help you avoid making a large down payment and qualify for a lower loan term. Though making a large one may still be beneficial.
- Higher chance of approval. A good credit score also improves your chance of getting approved for a loan at all.
Which credit scores are used
The credit score that will be used to determine your auto loan interest rate varies by lender. The two most common scores used by lenders are the FICO score and VantageScore.
The FICO score is the most widely used score for auto loans. The score ranges from 300 to 850. The score is calculated based on credit mix, payment history, amount owed, average credit history and available credit.
VantageScore used to range from 501 to 990, but now it ranges from 300 to 850. It weighs factors differently than FICO and has a different series of metrics. The metrics used include payment history, depth of credit, utilization, balances, recent credit and available credit.
Auto loan interest rates by credit score
The less risk you present to lenders, the lower the interest rate you can expect to pay. All rates mentioned are averages for new cars from the first quarter of 2022, according to the Experian State of the Automotive Finance Market report.
FICO credit score of 500 or less
Those with credit scores under 500 are considered to have deep subprime credit and will likely face the highest interest rates. The average auto loan interest rate for the deep subprime category was 14.76 percent. But, depending on your income and other factors, you may not even qualify for financing with a credit score of 500.
FICO credit score 501 to 600
Above 500 up to 600 is in the subprime range. You may have more borrowing options, but you’ll likely still benefit a great deal from raising your credit score before you apply — if you can afford to. Rates for this range averaged 10.87 percent — still steep.
FICO credit score 601 to 660
Those in this range are considered to have fair credit and are categorized as nonprime. Interest rates are a bit more likely to be favorable, with the average sitting at 6.7 percent.
FICO credit score 661 to 780
This wider range is considered prime. And with an average interest rate of 3.56 percent, you can shave thousands of dollars off the cost of your loan by upping your credit before applying for an auto loan.
FICO credit score 781 to 850
Those with credit scores in this range are considered super prime. If you have this level of excellent credit, you will likely qualify for the lowest rates. You may also qualify for 0 percent financing offers made by certain car manufacturers — or rebates.
How to get a car with bad credit
If you have less-than-perfect credit, you may have to pay a higher interest rate or give up certain perks. Direct lenders and dealerships may not even be willing to work with you, you with limited options if you can’t pay cash. The options you do have may have higher interest rates and fees.
Here are a few ways to get a car with bad credit:
- Shop for a subprime loan. Subprime loans are riskier for lenders. They are available for people with low credit scores, but they will result in higher interest rates and fees.
- Go to a buy here, pay here dealership. These dealerships typically have higher interest rates and additional fees for financing. You may also be required to purchase gap insurance, so be sure to shop around and compare each option.
- Pay cash. If you have enough cash to cover the entire cost of the vehicle, you can skip the auto financing process.
- Improve your credit score. If you can afford to wait, try to increase your credit score through a credit-building strategy. That may mean paying off a few small debts, not opening any new credit card accounts or increasing your available credit.
- Check your credit report for errors. It can take up to 30 days to get mistakes removed, so make sure you look well before you’re ready to buy.
The bottom line
While knowing your credit score will be a key factor in the auto loan approval process, it is not the only factor. Keep up to date with your credit score and work to improve it if you struggle to meet the minimum score requirement.