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Buying a car is an exciting investment, but it can come with some challenges, including being approved for a loan and securing a reasonable interest rate. If you’re ready for your next car, you may be worried about what you need when it comes to your credit score for a car loan.
In the second quarter of 2020, the average credit scores on car auto loans were 718 (new cars) and 657 (used cars) according to the Experian Automotive Industry Insights Report. So, does your score have to be 650 or higher to get approved for an auto loan?
Well, not exactly. In reality, there isn’t a set minimum score you need to get a car loan because your approval actually depends on a lot of factors. Additionally, many auto lenders want to give you a loan, even if you have bad credit. They just might give you a loan with steep lending conditions. Keep reading for a complete breakdown of how your credit score and other financial factors can impact your auto loan.
How will my credit score affect my car loan?
In 2019, the average car loan APR (annual percentage rate) was 8.06 percent. However, borrowers with strong credit saw an average of 5.66 percent, and borrowers with poor credit maintained an average APR of 21.54 percent. Clearly, your credit score directly impacts the interest rate you’ll receive on your car loan.
Ultimately, your credit score affects whether you get approved and what loan terms you’ll receive. That’s because your credit score is a representation of your financial habits. A high credit score indicates that you’re a reliable person who pays back their debts on time.
In contrast, a low credit score shows that you have trouble paying back lenders. As a result, lenders give out higher interest rates to applicants with low credit scores so they can protect themselves.
What credit score is considered good for a car loan?
You can often get a car loan with poor credit. However, the interest rate on that car loan may be extremely high. Typically, the best rates and easiest approvals go to individuals with a credit score of 750 or higher.
If your credit score is below 650, it’s considered a “bad score,” and you can expect you’ll have to walk through the negative items on your report and explain them.
Interest rates for new car auto loans
On average, you can expect to see the following interest rates for new cars:
- Credit Score of 781–850 (Super Prime): 3.24%
- Credit Score of 661–780 (Prime): 4.21%
- Credit Score of 601–660 (Nonprime): 7.14%
- Credit Score of 501–600 (Subprime): 11.33%
- Credit Score of 300–500 (Deep Subprime): 13.97%
Interest rates for used car auto loans
These are the average interest rates for used cars:
- Credit Score of 781–850 (Super Prime): 4.08%
- Credit Score of 661–780 (Prime): 6.05%
- Credit Score of 601–660 (Nonprime): 11.41%
- Credit Score of 501–600 (Subprime): 17.78%
- Credit Score of 300–500 (Deep Subprime): 20.67%
As you can see, the interest rates for someone with a deep subprime score can be four or five times as much as the rate for an individual with a super prime credit score.
Let’s look at how this translates to savings over the life of a loan.
Let’s say you’re purchasing a new $30,000 car with nothing down and a 60-month loan term. At a four percent interest rate, you’ll pay $3,150 in interest over the life of the loan.
On the other hand, if you have poor credit and get an interest rate of 14 percent, you’ll pay $11,883 in interest. This means you’re paying almost half the vehicle’s price in interest!
What can I do to help my car loan application?
There are a few different steps you can take that may boost your car loan application.
1. Be prepared with evidence of your finances
It’s best to come prepared to show where you stand financially. We recommend coming with proof of car insurance, employment and residence. Anything you can do to emphasize the good aspects of your financial profile will help. This approach is especially beneficial if you have a thin credit file or bad credit, because you’ll need to show the lender that they can trust you with an auto loan.
2. Explain negative items on your credit report
Your credit score could be low due to negative items on your credit report. Take the time to walk through these items with your lender and explain each one.
3. Work to build or improve your credit
Improving your credit can take time and will require patience, but it’s something you can act on right away. Start by:
- Signing up for automatic payments wherever possible, so you never miss a payment
- Paying off any outstanding debt that you can
You need to know your credit situation before you start applying. This will give you an idea of where you stand and how far you have to go for a better credit score. Your lender will access your credit report when evaluating your application. You don’t want to be surprised by anything they find.
Obtain your credit report to know what the lender will see and prepare your explanations. Additionally, accessing your credit report allows you to review it and ensure there are no inaccurate negative items. If you don’t know where to start with this process, CreditRepair.com can help you with your credit.
Apply with a cosigner
If you have someone in your life who has good credit and is willing to cosign your auto loan, it can significantly help your chances of approval. A cosigner promises the lender that they will take on responsibility for the loan if you can’t make payments.
Make a down payment
Not having strong credit isn’t always a reflection of your financial situation. Some individuals have a thin credit file but make a respectable income and have a sizable savings. If you’re in the position to put down a down payment on the auto loan, it can greatly increase your chances of approval. A down payment means the lender has to lend you less money, which is less risky for them.
Shop around
Just because one lender won’t work with you, it doesn’t mean another lender also won’t. Don’t give up, and keep looking for the best option for you. This also applies to interest rates. If the first lender approved you right away, it doesn’t mean you can’t find a better interest rate with someone else.
Remember to be wary of hard inquiries, though. When lenders look into your credit history, they can pull a soft inquiry or a hard inquiry. A soft inquiry doesn’t impact your credit score. On the other hand, a hard inquiry typically lowers your credit score by a few points. If you have multiple hard inquiries over a period of time, it can significantly drop your score.
Ask the dealership or lender to clarify if they’ll be pulling a hard or soft inquiry. If you’re shopping around, ask lenders only to pull soft inquiries and give you an approximate interest rate. When you’re ready to lock in one lender, they’ll pull a single hard inquiry and confirm your rate.
How can a car loan affect my credit?
If you pay your loan on time and in full, a car loan can boost your credit. The positive payment history will be added to your report, and your score will benefit.
Additionally, an auto loan adds credit diversity to your profile. This also helps to impact your credit score positively.
On the other hand, as with all other types of loans, your auto loan will hurt your credit if you don’t make your payments.
Do your homework before you start looking for a car loan
Dealerships now make more money on the car loans they give out than the vehicle sales themselves. Interest rates for auto loans are on the rise, which is clearly reflected in the monthly payments consumers are signing up for. The average new-car loan payment in the United States was $531 in 2018. With such high costs, you want to make sure that you’re getting a financially sound loan that makes sense for your circumstances.
Before you apply for a car loan, check your credit and know what’s working against you. Be prepared to supply relevant documents and understand what average rates you should be getting. Know that you have options, so you don’t have to (and shouldn’t) necessarily go with the first lender you find.
Lastly, if you’re getting an auto loan with bad credit, use this opportunity to improve your situation. Do everything you can to repair your credit, including making on-time payments on the auto loan. After a while, you’ll see an improvement in your score and may even be able to apply to refinance your auto loan for a better interest rate.
