Knowing your credit score, and how to make the most of it is vital. If you’re looking to buy a car on finance, your first thought could well be finding the best auto loans (opens in new tab) to help you get on the road. But before you start applying, you’ll want to take a moment to consider your credit score, as a less-than-stellar credit history could make it more difficult to realize your car-buying dreams. So what credit score is needed to buy a car? And are there exceptions and variations to these rules? We take a look.
How do credit scores affect loan rates?
Your credit score is an indication of your credit-worthiness and level of risk to a lender. In order to build a decent score, you’ll need to have successfully managed your credit commitments without any missed payments or repayment difficulties, proving to lenders that you’re a responsible borrower and can handle your financial obligations.
Your credit score is therefore a deciding factor in whether or not you’ll be accepted for a loan. Quite simply, in order to be approved, you’ll need a decent credit score – and the very best rates are reserved for those with the highest scores. This is because the higher your score, the more confident the lender will be that you can repay the loan, and they’ll be able to offer you a lower interest rate accordingly. Conversely, those with low credit scores can expect to pay higher rates of interest, which can add a lot to the overall cost of a loan.
What’s the minimum credit score needed to buy a car?
Minimum credit score requirements will vary according to the lender, but as a general rule, you’ll need a score of at least 661 to qualify for conventional auto loans. This puts you in the “prime” category, though a score of 700 or higher will be needed for the best rates.
It’s possible to buy a car with a lower score, but you’ll likely pay far more for it, with data showing that rates can escalate quickly for those without such a good credit history. For example, the average interest rate for borrowers with a prime credit score was 4.21% in 2020, according to Experian, but this rose to 7.14% for subprime borrowers (those with a score of between 501 and 600) and 13.97% for someone with a deep subprime score (300 to 500). In reality though, someone with a score of 450 or below will find it increasingly difficult to be approved for a loan, regardless of the rate offered.
Can I get a car loan with bad credit?
Yes, though as discussed, the rates will be far higher, and once you hit a certain point you’re likely to be flat-out refused. Even if you’re approved, you’ll want to consider the practicalities of accepting the loan rate offered – a high rate on a $30,000 car loan can mean you’re paying thousands of dollars in interest and will be facing high monthly repayments, which could make it wholly unaffordable.
You may also find that you have to seek specialist lenders in order to get a car loan with bad credit, with most traditional dealerships being out of reach in such cases. Such dealers will typically offer used cars at particularly high interest rates, so again, make sure that it’s worth the expense.
Another option for those with poor credit could be applying for a loan with a co-signer, such as a family member, who has excellent credit and agrees to share responsibility for the loan. This reduces the level of risk to the lender and could increase your chances of both being approved and securing a lower interest rate, though make sure to bear in mind the potential repercussions should you default on the loan and your co-signer has to foot the bill.
How can I improve my credit score?
By far the best course of action could be to improve your credit score before you begin applying for auto loans, thereby putting you in good stead to be approved – and crucially, to be offered a lower interest rate as well. But how can you improve it? Here are a few tips:
- Make sure to keep up with your credit commitments. Always pay bills on time and absolutely never miss a repayment, less you want derogatory marks (opens in new tab) to appear on your profile.
- Don’t apply for too many forms of credit over an extended period. If you’re shopping around for auto loans – which is always recommended in order to find the right deal for your needs – lenders will expect to see several different applications over a short space of time, which won’t damage your score. However, applying over a longer period, or applying for lots of different forms of credit, can put a dent in your score, so try to avoid repeated applications in the months before applying for a car loan.
- Pay down debt. Doing so can improve your credit utilization ratio, which is a key component of your credit score.
- Review your credit report to make sure all the information contained is accurate, and if it isn’t, contact the relevant credit bureau to get any errors removed (this is where credit repair services can be invaluable).
However, it’s important to bear in mind that it isn’t only your credit score that lenders will look at when deciding whether or not to offer you a loan. All aspects of your finances will be considered, including your income and any other credit commitments you may have, with your debt-to-income ratio having a key role to play in your application.
That said, you’ll want to go into any credit agreement with as decent a score as possible, if only to ensure you get the lowest interest rates, which is why it’s so important to spend time improving your credit score ahead of time. If you’re serious about improving things, consider seeking the best credit repair services (opens in new tab) to help, and find out how to get the best auto loan (opens in new tab) to keep your future repayments in check.
Compare auto loans at LendingTree (opens in new tab)
If you need to compare auto loans (which we absolutely recommend), a provider like LendingTree is a good place to start, as it gives you multiple loan rates all in one place, from a variety of lenders.