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What Credit Score Do You Need for a Car Loan?

Your credit score affects the interest rate you’ll get when applying for a car loan. Borrowers with the best credit usually get the lowest rates; lenders generally consider shoppers with sub-prime credit to be a riskier bet, so they charge higher rates. Consumers with very low credit scores may not be able to get a loan at all.

What Is a Credit Score?

Auto lenders evaluate an applicant’s creditworthiness based largely on their FICO score. Created and curated by the Fair Isaac Corp., FICO says its scores – which range from 300 to 850 – are used by 90% of the nation’s top lenders.

Related: Bad Credit Car Loans

According to FICO, consumers with scores in the 700-850 range are considered the most reliable borrowers. They get the lowest interest rates and the most favorable loan terms. On the other end of the spectrum, borrowers with scores below 669 are often considered “subprime.” That means they’ll pay more to finance a car.

Though the FICO score is the one used by most lenders, some use a credit score known as the VantageScore, which also uses a scale ranging from 300 to 850.

How Are Credit Scores Determined?

FICO scores are largely based on a person’s payment history and outstanding balances. Other considerations include the length of their credit history, recently opened credit lines, and their credit mix: how many credit cards they have and how much of that credit is being used, the number of retail accounts they have, their student loans, installment loans, etc.

In addition to the FICO score, a credit report will also note all open and closed credit sources, credit inquiries/applications made, and information on overdue debt, bankruptcies, or civil lawsuits. Lenders will further consider an applicant’s annual income to assess how large a monthly car payment they can afford.

Late or missed payments, debts that have gone to collection agencies, bankruptcies, exceeded credit limits, and outstanding tax liens all negatively affect FICO scores.

How Do You Check Your Credit Score?

Even if you’re not buying a car right now, it’s wise to keep track of your credit score. Federal law allows consumers to obtain one free report yearly from the three major credit bureaus: Equifax, Experian, and TransUnion. Many banks and credit card companies also provide free credit scores to their customers, so take advantage of that if you can. Checking your credit report regularly will not adversely impact your score.

What Is a Good Credit Score to Buy a Car?

How do FICO scores affect how much you’ll pay over the long haul? Lenders use bands of scores to determine interest rates. These are the bands used by Experian:

  • 800-850: A score in this range is considered excellent. Experian says 21 percent of borrowers have a score in this range.
  • 740-799: A score in this range is considered very good. Borrowers in this category qualify for low-interest rates, but not as low as those for borrowers with excellent credit. Roughly 25 percent of all borrowers have a FICO score within this range.
  • 670-739: Roughly 21 percent of borrowers score within this range. A score in this category is considered good and will qualify you for a decent rate.
  • 580-669: About 17 percent of people score in this range. This type of credit score is considered fair and places you in the subprime category. Subprime borrowers pay higher interest rates than those with good, very good, or excellent credit.
  • 300-579: A score in this range is considered very poor and places you in the subprime category. Roughly 16 percent of borrowers have scores in this range. Borrowers in this category pay the highest interest rates, and some may be denied credit altogether.

You can expect to pay anywhere from a few to 15 percentage points more for a loan than a borrower with good credit – and those percentage points can make your monthly payment much higher.

Running the numbers means someone with a FICO score in the 500 range may pay $10,000 more in interest over the life of a five-year, $30,000 car loan than someone with an excellent credit score.

On top of that, some auto insurance companies charge higher premiums (where allowed by state regulations) to motorists with poor credit. Some auto insurers say this is because drivers with low credit scores are statistically more likely to file auto insurance claims than policyholders with higher scores.

How Do You Buy a Car With Bad Credit?

If your credit score is less than optimal, thoroughly check your credit report. If you find an inaccuracy or mistake in your report, be sure to contact both the lender and the reporting agency to have it corrected. In a study conducted by the Federal Trade Commission, one in five people had an error on at least one of their credit reports.

Beyond that, you’ll have to work to improve a low credit score. Experts advise steadily paying down your existing debt – especially high-interest credit cards – and making all timely payments.

Next Steps

If you have questions about this story, please contact us at Editors@carfax.com