Credit Score for a Car Loan: What You Need to Know
Getting car financing can be difficult, especially if you don’t know what your credit score for a car loan should be. And like with any other loan type, this score is a key factor in determining whether or not you qualify, so it’s important to understand exactly what this numerical representation means and how it can affect your ability to get approved.
Here, we will discuss the importance of having good credit and what credit score is needed for a car loan. We will also include some tips on how to improve your credit score and make sure you are ready when you decide to apply.
When you’re looking to get a car loan, one of the first things lenders will take a look at is your credit score. This is a three-digit number that represents your financial history and borrowing habits. A high credit score means you’re a low-risk borrower, which is attractive to lenders.
Most lenders require a minimum credit score of 600 in order to qualify for a car loan. However, there are some lenders who will work with borrowers who have lower scores. So, even if your credit score is below 600, you may still be able to get a car loan, but you may also have to pay a higher interest rate.
But is it really worth it to settle for a higher rate? In case the answer is no for you, or you keep getting rejected, there are some things you can do to improve your score and ability to obtain a car loan.
Just be sure to know what your credit score is, and in case you don’t, you can check it for free on one of three major bureaus’ websites. Once you know your credit score, you can start shopping around for car loans or know how much you need to improve this number before shopping for a car.
What Is a Minimum Credit Score for a Car Loan?
A credit score isn’t just one of that information you can hide or hope that the lender will not check. When you’re looking to get a car loan, that probably is the first thing a lender will look at. A minimum credit score for a car loan is typically 600, but this can vary depending on the lender.
On average, the credit score for a used car loan is 678, while the average score for a new-car loan or lease was 738. About 66% of cars financed were for borrowers with credit scores of 661 or higher, so anything above this number can be considered a good credit score for a car loan.
This by no means had a point of discouraging you if you have a lower credit score. And the important thing to note here is that you may still be able to get a car loan, but also may have to pay a higher interest rate.
Remember that there is no ideal credit score for a car loan, just the higher the better.
How Your Credit Score Influences Your Car Loan
Well, this number is there to represent your creditworthiness or how likely you are to pay your bills on time. So now you can imagine why this score is so important to lenders. Your credit score is also one of the most important factors in determining the interest rate you’ll pay on your car loan. The higher your credit score, the lower the interest rate.
If you have a poor credit score, the consequences can differ. You may still be able to get a car loan, but you’ll likely pay a higher interest rate or be required to make a larger down payment. This is due to the fact that you are seen as a high-risk borrower by lenders. However, these risks can be offset if you can get someone with a good credit score to cosign a loan with you.
And in case you have good or excellent credit, you should shop around for the best interest rate before you apply for a car loan as there are many options available to you.
What Are the Commonly Used Credit Scoring Models by Lenders?
The full answer to the question of what should your credit score be for a car loan must include a brief introduction to different scoring models.
There are two main scoring systems in use today, a FICO Score 8 and VantageScore 3.0.
FICO is the most commonly used model and is what most lenders will look at when considering a loan. This system ranges from 300 to 850 or categories from poor to excellent.
The other system, VantageScore 3.0 is created as an alternative to the FICO model and has the same range. The difference between the two is the emphasis it gives to different factors from your credit report.
While lenders rarely ask for both scores, it’s still a good idea to know them so you can be prepared for any lender’s request.
How to Get a Car Loan with Bad Credit
For someone who has bad credit, it may seem impossible to get a car loan. But that’s far from the truth. There are plenty of lenders out there who are willing to work with you, even if your credit score isn’t perfect. Here’s how to get a car loan with bad credit:
- Shop around for a good deal. Just because you have bad credit doesn’t mean you have to settle for the first loan offer you get.
- Be prepared to make a down payment. Many lenders will require a down payment from borrowers with bad credit in order to offset the risk of lending to someone with a lower score.
- Have a co-signer ready. If you have someone with good credit who is willing to co-sign your loan, that will increase your chances of getting approved and may help you get a lower interest rate.
- Be willing to pay a higher interest rate. Interest rates on car loans for borrowers with bad credit will be higher so expect to pay at least 2% above the prime rate for your loan.
How to Build a Credit
The first thing you can do is make sure you pay all of your bills on time. This includes any loans, credit cards, or other debts you may have. Second, try to keep your balances low. This means don’t max out your credit cards or take out loans for more than you can afford to pay back.
Third, use different types of credit. This could include a mix of installment loans and revolving debt (like a credit card). While this may seem like an irresponsible move to you, the lenders would like to see you successfully manage multiple debts at the same time.
And lastly, don’t open new lines of credit too often. Every time you do, it creates a hard inquiry on your credit report, which can lower your score.
A good credit score is important if you want to get an auto loan. Even though the required score for a car loan depends on the lender, most of them will seek a minimum of 600. If you have bad credit, you may still be able to get a loan from a subprime lender, but you’ll likely pay a higher interest rate.
So, in case you’re not sure what your credit score is, check it out as you can do so for free. Once you have this information, plan your next move and see if it’s a better idea to improve it or shop for a car and leave the score as is.