What Credit Score Do You Need
To Buy A Car?
You don't need a perfect credit score to qualify for a car loan, but a less than favorable score can mean paying more in interest.
If your score is particularly low, it might make sense to work on improving it before you shop for a new ride.
Average loan rates by credit score
There are no hard and fast rules when it comes to credit scores and car loans.
In other words, there's no magic number you need to achieve before you can qualify. Likewise, there's no bottom figure that will absolutely stop you from getting a loan.
However, a low credit score could make it almost impossible to qualify—and stick you with sky-high interest rates if you do.
According to stats compiled by Value Penguin, the average interest rate on a 60-month car loan is 4.21 percent.
People with the highest credit scores—760 and above—can expect to receive the best deals on car loans. These folks will pay interest rates around 2 to 3 percent, which is less than the average.
By contrast, borrowers with scores below 580 can anticipate paying more than the average interest rate.
For these individuals, a car loan can come with rates between 5 and 10 times higher than the average.
How do my credit scores affect my car loan?
Because your credit score has such a big impact on your chances of qualifying for an auto loan, it's important to check both your credit score and your credit report before you hit the dealerships.
Here are the two main ways your credit score can impact your car loan:
1. A low score can make it difficult to get a loan
A poor credit score might not stop you from qualifying for an auto loan, but the number and quality of lenders willing to work with you will change depending on your score.
As your score goes down, the pool of available lenders shrinks. This doesn't leave you with many options, which can mean signing on for a high interest rate.
2. You might pay a higher interest rate
Unfortunately, having a low credit score makes you vulnerable to predatory lenders.
These lenders know you're unlikely to get credit elsewhere, and they offer loans with high interest rates that can trap you in a cycle of debt.
3 ways to increase your odds of getting approved
If you can't put off purchasing a new vehicle, there are a few strategies that could help you improve the likelihood of getting a car loan.
1. Work on your credit and refinance down the road
As with a mortgage, you can refinance a car loan to obtain a better interest rate.
If bad credit means you're stuck with a high interest rate now, you can work hard to rebuild your credit so you can refinance later on.
2. Get a co-signer
If you have bad credit or no credit history, consider borrowing someone else's.
Ask a parent or spouse with good credit to act as a co-signer, which can help you qualify for a much more favorable interest rate than you would get on your own.
3. Shop around
Just because you get turned down by one lender doesn't mean you're destined to get a "no" every time you apply—various lenders have different criteria for extending loan offers.
If you've struck out with one or two, don't be afraid to keep looking.
The benefits of waiting it out
In some cases, it makes sense to pause your car search for a few months.
Hitting the brakes for a bit can offer a number of benefits.
Take time to improve your credit score
If a low credit score is holding you back, delaying your search can give you the extra time you need to repair it.
Because your payment history makes up 35 percent of your credit score, just paying your bills on time over several months could boost your score considerably.
Save for a down payment
Waiting to buy also allows you to put money aside to use as a down payment, and the more you put down, the less you have to finance.
This will make your monthly payment lower and could make it easier for you to qualify for a loan.
Other decisions to consider
For most people, a car is a major purchase. As such, it makes sense to go into the process as prepared as possible.
The Consumer Financial Protection Bureau recommends keeping these four questions in mind:
1. What's your spending limit?
If you've ever walked inside a car dealership, you know how easy it is to get sucked into a sales pitch. Suddenly, the base model you looked at now comes with dazzling upgrades and must-have features.
Of course, all these extra bells and whistles come at a price.
Figuring out your max budget beforehand can help you keep a clear head when it's time to shop. Have a firm limit in mind when you visit the dealership—this can help you avoid impulse buys or peer pressure.
2. How much can you put toward a down payment?
Your down payment has a significant impact on your monthly payment amount.
In some cases, it's worth waiting a few months so you can save up enough cash to put toward your vehicle's purchase price.
3. Do you need a co-signer?
If you think you'll need a co-signer, line this person up ahead of time, and make sure both of you understand the responsibilities that come with co-signing on a car loan.
If you default, the lender will go after the co-signer for the monthly payments until the car is paid off. Be certain you can afford a new vehicle before you ask someone else to (co) sign on the dotted line.
4. How much is your trade-in worth?
If you have a trade-in, make sure you get an accurate valuation for it. While there are plenty of honest car dealerships out there, not all of them will give you a fair value for your trade.
You can check out Kelley Blue Book to get a general idea of your car's value.
For a more in-depth analysis, you might need to take your car to a reputable mechanic. An experienced mechanic will inspect your vehicle and assess its true trade-in value.
5 tips for increasing your credit score moving forward
Whether you decide to wait for a bit or move forward with your new car purchase, it pays to work on improving your credit score. You can either work with a credit repair company like Lexington Law to help you, or do it yourself.
Here are five tips to help boost your score.
1. Review your credit report
By law, you're entitled to one free report from all three major credit bureaus once every 12 months. You can order yours at annualcreditreport.com.
As you look over your reports, check for errors. If you spot a mistake, don't hesitate to dispute it.
Check out our post on disputing errors on your credit report for an in-depth guide.
2. Pay your bills on time
Your payment history is the most important factor for determining your credit score. Even one or two late payments can noticeably drop your score.
If late payments appear on your credit report, it's probably worth waiting six months to a year before you try to qualify for a car loan, or you can try disputing a late payment to get it removed.
While you wait, focus on paying your bills on time every month.
Over time, this positive payment history can improve your score enough to qualify for a loan with a good interest rate.
3. Keep your credit card balances low
If you carry a lot of credit card debt, this could be dragging down your credit score.
In addition to your payment history, lenders also look at your credit utilization to assess what kind of a lending risk you pose—this is the ratio of how much available credit you have compared to how much credit you're using.
As a general rule, you should aim to keep your credit utilization below 30 percent.
For example, if you have a credit card with a $5,000 limit, you should keep your balance below $1,500.
4. Don't close old accounts
Avoid closing old credit cards you no longer use. While you may not need the credit anymore, you can definitely use the credit history, which accounts for 15 percent of your credit score.
When banks decide whether to lend you money, they want to see if you've used credit responsibly in the past. If your credit history is short, they can't accurately predict how you'll use credit going forward.
By keeping old accounts open, you reap the benefits of years of credit history.
5. Avoid taking on too much new credit at once
When you apply for too much new credit within a short timespan, it can put lenders on high alert. They might assume you're in financial trouble and need quick access to cash.
This is why you should spread out new accounts, allowing for at least a few months between new credit applications.
Your credit score plays a big role in determining whether you'll qualify for a car loan. Your score will also dictate what kind of interest rate you can expect to pay.
If your score is low, consider temporarily delaying your car search while you work on improving your credit.
But if you're short on time and need a car now, commit to changing your habits so you can boost your score and refinance your loan at some point in the future.
About the Author
Mike is a recognized credit expert and founder of Credit Takeoff. His credit advice has been featured in CNBC, Investopedia, CreditCards.com, Bankrate, Huffpost, The Simple Dollar, Reader's Digest, LendingTree, and Quickbooks. Read more.