When shopping for a new or used vehicle, most consumers will finance their purchases. Only about 1 in 10 people have enough money on hand to pay cash for a new vehicle, thus automotive financing is available for both new and used vehicle shoppers. Your credit score can make a significant difference in securing a car loan or not. We will take a look at the minimum credit score required for securing such a loan, but that answer may surprise you.
Credit Score Basics
Credit scores represent a three-digit number based on how well you manage your credit. Every consumer has one and your FICO Score can fall between 300 and 850.
FICO isn’t the only score tabulated, but it is used by the majority of the major lenders in the United States. Your score is based on your credit history and is used to determine how much money you can borrow and at what interest rate.
Your credit score is based on information assembled by the three consumer credit reporting bureaus: Equifax, Experian and Trans Union. Information in those reports should accurately reflect your credit history, but mistakes do happen. Those mistakes as well as outdated information can lower your credit score.
Your Credit Score
FICO may not be the only credit score, but it is most likely the one used by your lender. While credit reports can be obtained for free, you must pay a nominal fee to retrieve your credit score.
What is considered excellent credit has everything to do with the car loan you are seeking. Advertised rates from manufacturers and lenders are for people with the best credit. Thus, if your score comes in below the best rates, you may not qualify for the lowest interest rate loans as advertised.
Excellent Credit Defined
Defining an “excellent” credit score may be harder to pin down. It all depends on your lender’s criteria and the type of loan you are seeking. That point of comparison is not static — it adjusts as market conditions change.
For instance, a mortgage lender may consider a score of 780 to be excellent and a score of 720 as “very good.” However, when it comes to auto loans, that 720 score may be sufficient to enable you to receive the best rate for your auto loan since each lender sets their own criteria.
Experian, one of the three consumer credit reporting agencies, says that most scores fall between 600 and 750. Furthermore, a score above 700 “usually reflects good credit management.” However, that “good” score does not mean your credit is excellent.
Minimum Credit Score
We still have not answered the question at hand — what’s the minimum credit score needed for a car loan? That answer depends on the individual lender. Thus, the minimum score might be 680 for one lender and 640 for another lender. Consequently, you need to approach borrowing in the same way that lenders understand it — as an individual consumer.
What you should know is that there are lenders who will provide car loans to people with lower credit. Typically known as “subprime loans,” these loans are not underwritten by every lender and are usually offered by certain banks and financing companies.
Interest.com notes that subprime loans cover people with credit scores between 501 and 600. However, these borrowers are also charged interest rates that are 3 to 5 times higher than prime borrowers. Thus, if a lender is touting a 2 percent interest rate on a car loan, you should know that this rate applies only to people with the best credit. If you have a subprime credit score, your loan rate may fall between 6 and 10 percent, perhaps more.
The Bottom Line
Clearly, there are lenders for nearly every type of consumer. That means you may be able to find a car loan no matter how low your credit score is. But it will also come with a price — a higher interest rate. Moreover, your lender may restrict the amount of money you can borrow to help keep your monthly payments down.
So, how can you obtain a favorable car loan? By shopping around. And if your score is low you need to be diligent here, otherwise your rate may come in higher or you may be turned down for the loan.
It is harder to secure a new car loan if your credit score is low. However, that same lender may approve your request for a used vehicle, including a certified pre-owned (CPO) vehicle from a dealer. You might also check with your bank or credit union to arrange financing on your own. Indeed, your bank should be familiar with you and that personal knowledge may cut you some slack if your credit score is low. In any case, borrow what you can afford to repay even if that means settling for a different make or model.