If you’re in the market for a new car, you might be wondering if your current credit score will help you get a good deal or hold you back. Your credit score is an important part of the process, but it’s not the only factor. Though good and excellent credit scores help when taking out any line of credit, it is possible to buy a car with a less-than-ideal score.
Your credit score is a number that measures your reliability as a borrower. It’s calculated based on the information in your credit report, which includes details about your past and present loans and payment history. Naturally, your credit score impacts your ability to get a loan.
The typical car buyer has a credit score of 732 for new car loans and 665 for used car loans, according to Experian’s Q2 2021 report. But don’t be alarmed if your score isn’t there yet—these are just averages, and qualifying for an auto loan can be subjective. A good credit score doesn’t guarantee approval and a below-average credit score won’t necessarily prevent you from qualifying.
On top of that, there isn’t an industry minimum for credit scores. Even borrowers with scores below 500 can technically qualify for an auto loan. That’s because auto lenders don’t just look at your score. They also consider factors like your vehicle’s price and monthly income.
Of course, it’s always better to have a good credit score—and it certainly doesn’t hurt your chances of qualifying for a car loan.
And it makes sense. Think about the process from a lender’s perspective. Imagine you’re trying to decide whether or not to lend a stranger money, with the promise they’d return the funds. Would you lend money to someone with a history of missed debt payments? Or would you prefer to lend money to someone who has made their payments on time historically? That’s why lenders prefer applicants with good credit scores.
A good credit score can also keep money in your wallet. If you have a higher credit score, auto lenders are more likely to offer you loans with favorable terms, like a lower interest rate, longer term (e.g., a five-year loan versus a three-year loan), or larger loan amount.
In an ideal world, we’d all have perfect credit scores of 850—but that’s unrealistic. Fortunately, you don’t need an excellent credit score to buy a car. Rather, it may be more helpful to review the lender’s requirements and the average scores of approved applicants.
There’s no such thing as a universal minimum credit score—credit score minimums vary from lender to lender. One reason is that lenders assess your entire financial profile, not just your credit score. Beyond that, lenders also consider factors like your down payment and debt-to-income ratio.
In Spring 2021, Experian reported the average FICO credit score for new car buyers was 732. Meanwhile, used car buyers had an average credit score of 665. But credit score is only one piece of the puzzle. It’s helpful to also consider other loan factors, like the loan-to-value ratio (LTV).
An LTV, which is expressed as a percentage, compares the balance of a loan against the value of the underlying vehicle. For instance, if your car is worth $10,000 and your outstanding balance is $12,000, your LTV would be 120%. According to Experian’s report, the average LTV of a new car loan was 110.9%, while a used car loan was 108.4%.
If your credit score is less than ideal, you may be able to improve your chances of qualifying with a lower LTV.
It’s not much of a surprise that a better credit score can help you save money—but how much varies by lender. For example, if you have a $20,000 new car loan with a 36-month term, here’s how your credit score could impact your monthly payment and total interest.
|Annual percentage rate (APR)||3.76%||5.04%||7.35%||10.12%||14.60%||16.04%|
|Total interest paid||$1,180||$1,592||$2,348||$3,274||$4,818||$5,327|
If you have a good credit score, you have a better chance of qualifying for a loan through a traditional lender, such as a bank or credit union. Otherwise, you may have to rely on dealership financing or subprime lenders. Traditionally, loans from these issuers are more expensive with less favorable terms—such as prepayment penalties.
A better credit score opens the door to better terms, such as lower interest rates. As you can see from our example, the interest savings are significant from tier to tier. A credit score in the top tier only pays $1,180 of interest over the life of the loan. Conversely, a score between 500 and 589 leads to $5,327 of interest—that’s an extra $4,147.
Owning or leasing a car can be expensive. And auto loan payments plus the cost of car insurance can be a steep line item in your monthly budget. But the higher your credit score, the more likely you are to secure a lower monthly payment for your car loan. That’s less money going out the door and more money in your bank account.
If you have a less than ideal credit history—or no credit history at all—you aren’t relegated to bicycles and public transportation until the end of time. You may still be able to get a car loan. Through a few strategic moves, you can improve your strength as an auto loan applicant, even if you have minimal or poor credit.
When you purchase a car, you’ll have the option to make a down payment. This not only reduces the size of your loan but also helps build positive equity in your vehicle. Lenders like that.
More specifically, lenders prefer to see a lower loan-to-value ratio (LTV). So, if you make a bigger down payment, you decrease your LTV.
Keep in mind, depreciation waits for no one. As soon as you drive off the lot, your car’s value takes a hit. A down payment can help offset that inevitable drop.
There’s nothing wrong with leaning on the financial shoulder of a partner or relative. If you have lower credit scores (or no credit whatsoever), you can apply for an auto loan with a co borrower or cosigner that has better credit. That said, it’s worth mentioning that your cosigner is effectively promising to cover the loan if you stop making payments.
Even if you don’t have credit, it’s possible to find a less conventional lender that’s willing to give you an auto loan. However, your loan offer might include higher interest rates, prepayment penalties, or other less-than-desirable terms. If you can manage without a car, it might be a wiser personal finance decision to build credit first and avoid high interest rates.
Building credit not only helps you qualify for an auto loan but also secure the best terms, such as a lower interest rate. This translates to lower monthly loan payments and more money in your pocket. Fortunately, it’s not as complicated to build credit as you might think.
Your payment history accounts for 35% of your FICO credit score. If you want to increase your score, make your payments on time, every time. This is low-hanging fruit for all wannabe credit-builders out there.
Behind payment history, your credit utilization has a significant impact on your credit score. By lowering this metric (e.g., paying down credit card debt), you can improve your score and rake in savings on your auto loan.
Have you checked your credit report recently? If not, you might be selling yourself short to auto lenders. Credit reports aren’t impervious to errors—it’s actually more common than you’d think.
As part of a ConsumerReports study, 5,858 volunteers checked their credit reports for mistakes, and a whopping 34% of participants found at least one error.
Did you know you’re entitled to free credit reporting each year? You can get a copy of your report from the major credit bureaus: Equifax, Transunion, and Experian. Due to the pandemic, you can actually get weekly updates of your credit report through April 2022.
When you take out your loan, your credit score might take a dip. This is normal because you’re increasing your total debt. But as you make on-time payments and repay your loan, your credit score could increase.1
Minimum credit score requirements vary from lender to lender—regardless of your down payment. That said, a down payment is still worth considering, especially if you want a lower monthly car payment.
The better your credit score, the better your odds at getting a car loan with favorable terms. A higher score could translate to better rates and the option of a longer term. However, your credit score alone doesn’t guarantee approval or denial (or even access to the best rates).
Your credit score always matters when taking out a loan. So it will still be taken into account regardless if the car is old or new. But if you’re paying cash, the dealer may not need to see your credit report or credit score.
1 Reducing debt and maintaining low credit balances may contribute to an improvement in your credit score, but results are not guaranteed. Individual results vary based on multiple factors, including but not limited to payment history and credit utilization.