If you’re thinking about upgrading your ride, you might be wondering, “what credit score is needed to buy a car?”
After all, aside from what make and model you’re going to get (and what color it’s going to be!), this is one of the most important considerations you need to make.
Your credit score isn’t the only variable that goes into applying for and getting a car loan. However, it’s one of the most significant factors that auto lenders look at.
So, what credit score do you need to buy a car? let’s take a deep dive into this question so you can get the answer you’re searching for.
Buying a Car: What Happens in the Finance Office
If you’ve never applied for a car loan before, you might have some anxiety over what occurs in the dealer’s finance office. Don’t worry – it’s not as scary as it seems.
If you have a decent credit score and a solid payment history on other credit accounts, don’t worry! This process will be a cinch. If you have bad credit, there’s no need to panic, either – but you will have some more explaining to do.
We’ll give you more information on what qualifies as a “good” credit score below, but the plus side is that you can get a decent auto loan with a credit score that’s considered suboptimal.
If you have a credit score that you are less than proud of, know that people with bad credit are routinely approved for car loans. You just have to be willing to do some explaining. For instance, you’re more likely to get financing if you have one large debt but haven’t missed any of your monthly payments in decades versus if you have lots of individual debts and are frequently late on your bills.
You are also more likely to get a loan if you have a stable job, own a home, and are able to put down a significant down payment.
When you show up to the finance office, bring things like your proof of residence documents, pay stubs, and proof of auto insurance. If you come to the dealer with all your ducks in a row, the process will be way easier. You should be able to prove that you’ve been paying bills on time for at least the last six months.
Does a Car Loan Build Your Credit Score?
Some people are reluctant to apply for a car loan at all, assuming that all types of credit and debt, from student loans to mortgages and of course, car loans, are bad.
Not all debt is bad. In fact, having some credit can make it easier for you to pay for the things you want and need. Although this might surprise you, having zero credit is often worse than having bad credit.
A car loan can help you build your credit in a variety of ways – primarily through your payment history and credit mix.
Your payment history is simply your personal record of paying bills on time. When you pay your monthly car payment. lenders will report your payments to the three credit bureaus, which is information that will then be used to calculate your credit score.
Credit mix will display whether you have installment loans (like a mortgage loan or auto loan) or revolving credit (revolving credit is what you might be familiar with if you have credit card debt). If you only have credit cards to build your credit score, getting a car loan can help improve your credit score because it shows you have both revolving and installed credit on your credit report.
What Credit Reports Do Auto Lenders Look At?
Most auto lenders use multiple credit scores to help determine whether you should get a car loan. There are three major credit bureaus, including Experian, TransUnion, and Equifax.
To tap into these scores, most financial services look at FICO or VantageScore. FICO is the most widely used scoring company. However, some companies may use VantageScore instead or as a complement to FICO.
What is the Minimum Credit Score to Buy a Car?
So what is the minimum score to get a car loan? The truth is that you can often get a new car loan with any credit score – but having a better credit history will increase your odds of getting a better loan.
Most lenders consider the following scores for consumers:
- Super prime: 781 to 850
- Prime: 661 to 780
- Non Prime: 601 to 660
- Subprime: 501 to 600
- Deep subprime: 300 to 500
To get a car loan, you generally need to be in the prime level or higher.
How to Buy a Car if You Have Poor Credit
Bad credit? Don’t panic if you don’t necessarily meet the minimum credit score needed to buy a brand-new car. Here are some tips to help you buy a car – no minimum score needed.
1. Expect to Pay a Higher Interest Rate
If you have bad credit, you still may be able to score a new ride (you just might pay more for it). You’ll pay a higher insurance rate (in some cases, one that’s double what you might otherwise).
Don’t panic if your interest rate is higher than you might like, either. Often, if you’re diligent about improving your credit score, over a period of time you may be able to elevate it enough so that you can refinance your auto loan with lower interest rates.
2. Pay Higher Monthly Payments
If you want to avoid high-interest rates but don’t have excellent credit, you may be able to get a decent interest rate by agreeing to pay higher monthly payments. Similarly, you can often spread your payments out over a longer period of time to make it easier for you to repay the loan.
3. Apply With a Cosigner
If you have a friend or loved one who is willing to vouch for you, getting a cosigner can be a good idea. They’ll share responsibility for the loan and if they have excellent credit, this may make it easier for you to qualify for a lower interest rate.
5. Go to a Dealer That Specializes in Poor Credit
There are some auto dealers that specialize in auto loans for people with poor credit. They are generally advertised as buy here, pay here dealerships that offer in-house financing.
They tend to charge high-interest rates and unfortunately, if you get a loan from one of these lenders, it won’t build your credit score since your payments won’t be reported to the credit bureaus.
Tips to Get Better Auto Loans in the Future
Now that you’ve navigated this hurdle, here are some tips to help you secure better loans in the future.
1. Mind Your Payment History
Paying bills on time is one of the best things you can do when it comes to improving your credit score. A payment that is allowed to go more than 30 days past due can seriously harm your credit score. Even if you can only pay the minimum $25 payment, pay something. It’s better than the alternative!
2. Keep Credit Card Balances Low
Don’t put purchases on your credit cards unless you can afford to pay them. By keeping your credit card balances low, you’ll be lowering your “credit utilization” score, which has a major impact on your overall score.
3. Keep Credit Accounts Open
It’s tempting to close all of your credit card accounts if they’re paid off and you’re trying to improve your credit score. Don’t do this – it will backfire.
Unless you have a strong, compelling reason to close them, keep your credit accounts open. If you close them, your overall credit limit will drop, which can hurt your score as it relates to credit utilization.
4. Communicate with Credit Card Companies, Credit Bureaus, and Other Authorities
Communication is key when it comes to your credit score. Communicate with lenders, credit card companies, credit bureaus, and anyone else who might have anything to say about your credit score.
Case in point – if you have a high credit card bill this month and don’t think you’re going to be able to pay it, call the company. They may be able to reduce your payments for you or at the very least, hold off on reporting a missed payment to the credit bureau (which can cause your credit score to nosedive).
5. Avoid Applying for Lots of Credit
Applying for lines of credit, even if you don’t ultimately receive them, is not a good idea if you are planning on getting a car loan. Any hard inquiry on your credit report reflects poorly on your overall score. Instead, avoid any other application within six months of applying for your auto loan.
Check Your Credit Report Often if You Plan to Buy a Car
The biggest tip you can be aware of when you are planning to buy a car (or take out any kind of loan) is to keep close tabs on your credit score and report.
This will help you keep track of any issues or red flags before they become hugely problematic, as well as to give you a general idea of what your credit card might be.
There are all kinds of free resources out there that will help you do this, from Discover to Credit Karma. Many of these services also offer tips on how to help lower credit scores, too.
Drive away with the best possible deal – consider these tips to get car loans that won’t break the bank, even if you have poor credit.
