A good credit score to buy a car is typically higher than 670 points, which means your score is near or slightly above the average of U.S. consumers and you are financially responsible.1 A low credit score may not prevent you from buying a car, but you may receive loan offers with less than ideal loan terms.
To prepare for working with auto lenders, it could be a good idea to read up on credit scores, to learn how they impact loan approval, whose credit score is used on a joint auto loan, and how to improve your credit score! In this article, we’ll answer the question, “Whats a good credit score to buy a car?”
Leasing vs. Buying a Car
You may wonder whether leasing or buying a car with auto loans is better. About 20% of all new cars in the United States were leased in 2022.2 An auto lease may be better for some individuals, while buying may be better for others. If you’re wondering about the differences, take a look at the leasing vs. buying comparison chart below.
| Aspect | Leasing a Car | Buying a Car |
| Ownership | You don’t own the car; you return it at the end of the lease term. | You own the car and can keep it as long as you want. |
| Upfront Costs | Typically includes the first month’s payment, a refundable security deposit, acquisition fee, and other miscellaneous fees. | Usually includes the upfront payment, taxes, registration, and other fees. |
| Monthly Payments | Generally lower than buying because you’re paying for the car’s depreciation during the lease term plus interest and fees. | Higher than leasing, since you’re paying for the entire purchase price of the car, plus interest and other finance charges. |
| Customization | Limited; the car must be returned in saleable condition, which can incur costs if modifications are made. | Unlimited; you can modify or customize your car as you see fit. |
| Mileage Limits | Leases have mileage limits, and you will be charged for exceeding them. | No mileage limits; you can drive as much as you want. |
| Maintenance | Often includes maintenance packages that cover routine service. | Maintenance and repairs are your responsibility, but you have the freedom to choose where and how your car is serviced. |
| Future Value | No concern about the car’s future value as you don’t own it. | The car’s resale value is yours to consider, which can be an asset or a liability. |
| End of Term | At the end of the lease, you can walk away, buy the car, or lease a new one. | You may sell or trade the car, or keep driving it. |
| Early Termination | Ending a lease early can be costly due to termination fees. | You can sell or trade in the car at any time, though you may owe more than what the car is worth if it’s early in the loan term. |
| Credit Requirements | Generally requires a good credit score; those with lower credit scores may pay higher interest rates. | More flexible; people with lower credit scores may find financing options, though at higher interest rates. |
How an Auto Loan Works
An auto loan, also referred to as a car loan, is a specific type of loan with monthly installments used with the express purpose of purchasing a vehicle. While you repay the loan, you can drive the vehicle. However, it will legally belong to the lender until you repay the auto loan.
To get an auto loan, you fill out an application with a lender for the amount of the purchase price minus the upfront payment. You purchase the car with the money you borrow from the lender. Once you have your new vehicle, you will make monthly payments until the full balance of your car loan is paid off.
Every auto loan will have an interest rate that is applied to the balance each year and your credit score could have a significant impact on what APR you can qualify for. Term lengths for auto loans typically vary between one and five years.
Defaulting on your car loan could result in the vehicle being repossessed by the lender. But how many car payments you can miss before repo depends on your loan agreement.
Why Are Credit Scores Important for Auto Loans?
Your credit score is meant to represent your financial responsibility and the risk involved in lending to you. Lenders always check credit scores before approving you for a loan or revolving credit of any kind for assurance that you will pay back the money you borrow on time.
Your credit score might determine whether you are approved for an auto loan at all but it will also heavily influence what your interest rates look like. Oftentimes, a higher interest rate is used to offset the risk involved for a lender working with a borrower with a lower credit score. The more credit risk a borrower poses to a lender, the higher the cost of the loan will be through interest charges.
How Credit Scores Are Calculated
To better understand why credit scores are so important to auto lenders, it could be helpful to break down how credit scores are calculated. Knowing how credit scores work will also help you determine what you need to change in your financial habits to obtain a higher score. If your credit score is currently too low to be approved for a car loan or get the interest rate you want, you could boost your credit score by improving the information reported to the major credit bureaus.
The three major credit bureaus are:
- TransUnion
- Equifax
- Experian
These credit bureaus compile consumer credit reports out of all information relevant to your creditworthiness. As shown below, these credit reports are then broken down into five categories, each afforded a different percentage, to calculate your FICO Score.
Payment History (35%)
The payment history on all your credit accounts is the most impactful category in your FICO score calculation. Making up 35% of the equation, payment history is recorded by the credit reporting agencies for all the accounts included on your report such as credit cards, quick cash loans, installment loans, mortgages, and auto loans.
Consistent on-time payments make you a reliable borrower. But late payments can remain on your credit report, impacting your FICO score for up to seven years.
Amounts You Owe (30%)
Next, the amounts that you owe on your credit accounts make up for 30% of your FICO credit score. The most important aspect of this category is your credit utilization rate which plays a vital role in the calculation of your score. A credit utilization rate compares the total amounts you own on your credit accounts to the available credit you have. For good credit, borrowers are advised to keep their credit utilization as low as possible – optimally at 30% or below.
Length of Your Credit History (15%)
How old your credit history is can impact your FICO credit score greatly. A very limited credit history without older credit accounts is going to make it more difficult for you to obtain a good credit rating. This section of the credit scoring model considers the age of your oldest and newest accounts in addition to the average age of all your credit accounts combined.
Credit Mix (10%)
How much diversity you have in your credit mix accounts for 10% of your FICO score calculation. More variety of types of credit will bring your credit up while an overconcentration of one credit type could bring your score down. Getting an auto loan will likely benefit your credit mix.
New Credit (10%)
Each time you apply for new credit, including auto loans, you are authorizing the lender to pull a copy of your credit report. When a lender pulls your credit report, a new hard inquiry will show up on your credit. Opening too many new accounts or getting too many hard inquiries in a short period of time can harm your credit score.
What Credit Score Should You Have for a Car Loan?
There is technically no minimum credit score that is required to be approved for a car loan. Each lender has different requirements when it comes to a minimum credit score needed for approval. Because of this, it is possible to find an auto lender willing to work with you no matter your credit score if you know where to look and are willing to pay higher interest rates. However, some of the more reputable lenders may reject your application if you cannot meet their unique minimum credit score.
Good and excellent credit scores will secure the most competitive interest rates available. You are sure to be approved and receive a decent interest rate if you have a credit score over 700. However, if you have fair to bad credit, you can expect rates nearly double what those with good credit can get.
Can You Get a Car Loan With Poor Credit?
It is definitely possible to buy a new car with bad credit. There are lenders who are willing to work with subprime borrowers but they will be charging significantly higher interest rates to make up for the increased risk. A bad credit score in the deep subprime range under 500 points will pay a high price for their auto loan.
If you are considering an auto loan with poor credit, you will need to be very careful to prevent yourself from falling into a debt trap. You want to be sure that you can afford the monthly payments and have the ability to repay the full balance by the end of the loan’s terms. If you want to avoid those sky-high interest rates for poor credit scores, consider taking some time to boost your credit score before applying for your car loan.
Navigating Car Loans with No Credit
If you don’t have a credit file, lenders may consider you a subprime borrower, which simply means you are a higher risk. Having bad credit doesn’t necessarily close doors; it just means that the interest rate offered to you might be higher than those with established credit histories and higher credit scores.
Here’s what you should keep in mind when looking for auto loans with no credit:
- Proof of Responsibility — Gather evidence of financial stability. This can include bank statements, utility bills, or any other documents that prove you can manage regular payments.
- Credit Builder Products — Consider credit builder loans or secured credit cards to start building a credit profile. These products are designed to help you build credit scores because your payment history is reported to credit reporting agencies.
- Higher Rates, Shorter Terms — Be prepared for higher car loan rates. However, choosing a shorter loan term can reduce the amount of interest you pay over time.
- Down Payments — A substantial down payment not only reduces the loan amount but also demonstrates to lenders that you’re serious and capable of saving money.
- Co-signers — A co-signer with established credit can bolster your application, potentially securing you a better interest rate. But a cosigner loan can be risky for the cosigner.
- Shop Around — Don’t settle for the first offer. Compare rates from various lenders, including those that specialize in fair or poor credit financing.
- Buy Here, Pay Here Dealerships — These dealerships may not require an established credit score, but be cautious of higher interest rates and less favorable terms.
How To Improve a Credit Score for Auto Financing
To access the best deals and lowest interest rates on your car loan, you can do certain things to improve your credit score. Taking some time to boost your credit score before applying for an auto loan can increase your chances of being approved for the amount you want and lower interest rates.
Here are some strategies and tips you can use to boost your credit score:
Check Your Credit Report Regularly
When attempting to make improvements upon your credit, it is a good idea to check your credit report regularly. Checking your credit often can allow you to catch errors or inaccuracies that need to be disputed before they have a chance to bring down your credit score.
If you identify any false information on your credit report, you can dispute it to the credit bureau that compiled that report. You might even catch errors that have been hurting your credit for a long time without you noticing. Having false derogatory marks on your report removed could significantly increase your credit score almost overnight.
Become an Authorized User
If you have a fairly sparse financial history but wish to obtain an auto loan early on in your credit journey, you can quickly increase the average age of financial accounts on your report by getting listed as an authorized user on a friend or family member’s credit card.
When you become an authorized user on another person’s credit card account, that account is added to your credit report. If this credit account is particularly old or well-established, this will significantly improve the average age of your credit history on your report. This plus an additional excellent payment history could raise your credit score quickly.
Make All Your Payments on Time
Your payment history accounts for 35% of your credit score calculation which is the biggest portion of the credit scoring system. For this reason, late payments have a highly negative effect on your credit report. Consistently making all your payments on time for a prolonged period will rebuild your payment history and improve your credit score significantly.
If you are someone who often forgets to pay your bills on time, we recommend turning on automatic payments for your credit card bills. Doing so will ensure you are never late for a payment that impacts your credit report again. Automatic payments can make on-time payments incredibly easy.
Reduce Your Credit Utilization Rate
Your credit utilization ratio compares the amount of money you owe to the total overall credit limit you have. If you have little available credit left and high balances on your credit cards, you likely have a very high credit utilization rate which is harmful to your credit score.
Most financial experts advise borrowers to keep their credit utilization rate under 30% to have a high credit score. The lower your credit utilization, the better for your credit. To reduce your credit utilization ratio, pay off a few of your credit card balances and keep the accounts open to maintain your available credit.
Stop Applying for New Credit
Applying for credit cards, online loans, or other forms of credit authorizes the lender or company to pull a copy of your credit report. Everytime this happens, a new hard inquiry will appear on your credit report. When trying to improve your credit score, it is a good strategy to take a break from applying for new credit to ensure there aren’t too many hard inquiries on your credit report.
What Other Factors Affect Approval for Car Loans?
When you apply for a car loan, lenders look at more than just your credit score to determine the terms of your loan. Here are some other key factors that can influence the terms of your car loan:
Income Stability
Lenders want to see that you have a steady source of income to ensure that you can make your monthly payments. Stable employment, typically for at least two years with the same employer, is often seen as a sign of financial reliability. A consistent or increasing income can lead to more favorable loan terms because it reduces the lender’s risk.
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio is a measure of your monthly debt payments compared to your monthly gross income. Lenders use this ratio to gauge your ability to manage monthly payments and repay outstanding debt. A lower DTI ratio indicates that you have a good balance between debt and income, which can qualify you for better loan terms. Typically, lenders look for a DTI ratio of 40% or lower, including the potential car loan payment.
Down Payment
Making a substantial down payment can significantly affect your car loan terms. A larger payment reduces the lender’s risk by decreasing the loan-to-value ratio, which is the amount of the loan compared to the value of the car. It also means you’re borrowing less, which can result in a lower interest rate, smaller monthly payments, and a shorter loan term. Additionally, a significant upfront payment can sometimes offset a lower credit score, making lenders more willing to offer you a loan.
Finding the Right Auto Lender
In order to find the right auto lender for you, it’s crucial to consider various factors. Here’s a few tips to consider when comparing lenders and looking for the right loan offer.
- Research Lenders: Look into various types of lenders, including banks, credit unions, online lenders, and finance companies.
- Compare Rates: Don’t accept the first offer. Get quotes from multiple lenders to compare interest rates and terms.
- Read Reviews: Check customer reviews and ratings for potential lenders to gauge their service and reliability.
- Ask About Pre-approval: Getting pre-approved can lock in an interest rate and give you a better negotiating position at the dealership.
- Check for Special Offers: Sometimes lenders have promotional offers that can lead to more favorable loan terms.
- Negotiate: Remember that loan terms may be negotiable. Don’t be afraid to discuss terms and conditions with potential lenders.
- Understand the Fine Print: Before signing, make sure you understand all the details of the loan agreement, including the APR, term length, and any prepayment penalties.
- Look Beyond the Monthly Payment: Consider the total cost of the loan over its lifetime, not just the monthly payment.
Frequently Asked Questions About Good Credit Scores
Auto lenders may use various credit scoring models, including the FICO auto score, which is specifically tailored for car loans. This model considers your credit history with auto loans more heavily.
While there’s no universal minimum credit score for an auto loan, a higher credit score typically means better loan terms. Lenders may have their own thresholds, so it’s best to check with them directly.
Even with bad credit, car loans are possible. Some lenders specialize in bad credit car loans, and a credit union may offer more flexible terms. Expect a higher interest rate and possibly a larger upfront payment.
The average credit score for competitive interest rates can vary, but generally, a score above 660 can fetch better rates. For the best rates, aim for a FICO auto score in the ‘good’ range or above.
To negotiate a better interest rate, improve your credit scores before applying, shop around with multiple auto lenders, and be prepared to discuss terms. A larger upfront payment can also help your case.
A larger down payment can offset a low credit score when applying for a used car loan. It reduces the lender’s risk and can help you secure a loan with more favorable terms.
Your credit limits can impact your credit utilization ratio, which is a factor in credit scoring models. A lower utilization rate can lead to a higher credit score, which is beneficial when applying for a car loan.
Yes, credit unions are known for working with members who have a range of credit scores. They often offer more personalized service and may be more willing to consider your entire financial picture beyond just your credit score.
There’s no difference between a car loan and an auto loan; they’re just two terms for the same financial product. Both refer to a loan taken out to purchase a vehicle.
To ensure your monthly payment is manageable, aim for a loan with a lower interest rate, choose a longer loan term, make a significant upfront payment, or consider a less expensive vehicle. Always calculate your budget before committing to a loan.
CreditNinja’s Thoughts on Buying a Car
Have patience as you employ all these tactics to improve your credit as it may take a little bit of time to take effect. But consistently practicing all these credit habits will do wonders for your credit score so you can access better interest rates on your auto loan!
CreditNinja offers online financial articles to help consumers better understand loan products and improve their personal finance. If you want to know how to fill out a personal loan application, why there’s a credit score drop after a dispute, or even how to start budgeting with irregular income, check out the CreditNinja Dojo!
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