When shopping for a new (or new to you) car, it is easy to get caught up in the excitement of four new wheels on the open road.
Perhaps you are looking at the convertible you have always dreamed of owning, or maybe you are simply upgrading your minivan after two toddlers wreaked havoc on your first one.
Car shoppers are easily excited by the latest bells and whistles on autos, and we fall quickly for things like heated seats, satellite radio, and even an overabundance of cup holders (you can never have too many cup holders).
In all of this excitement, it is easy to lose sight of the hurdles we may face when it comes to securing the loan for the car, whether that is through dealership financing, an auto lender, or a bank loan.
The dreams of putting the top down and cruising on a sunny day can quickly be squashed by the weight of a rejected or impractical loan, and in many cases that result could be down to your credit score.
A good credit score is an important factor in an auto loan. But how do you determine if you have excellent credit, poor credit, or a more average credit score? Here, we will explore just how good that score needs to be to make a car loan feasible.
How Does Credit Scoring Work?
If you are shopping for a car you should be familiar with how credit reporting and credit scores work, as well as your current credit rating.
There are tons of credit reporting agency options on the market today where you can find your score. If you do not currently have it, you can get a credit report for free at annualcreditreport.com.
Your fico score (aka a credit score) is divided into five categories:
300-579: Very Poor
Borrowers in this range are typically rejected by lenders. In the chance that they are approved, they will likely secure bad credit auto loans, and be required to pay some type of initial fee, a higher interest rate, or an upfront deposit to secure a loan.
Borrowers who fall into this category may also be referred to as a“subprime borrower.”
In this range, borrowers are more likely to be approved for loans, but not always at the best loan term rates.
740-799: Very Good
This category finds borrowers receiving much better interest rates on loans.
This is the ideal scenario for a borrower (and a lender, too, who has great assurance the money will be paid back). Here, you are considered a prime borrower, or a super-prime borrower.
Now that you know how the scores are viewed by lenders, you are probably wondering: “Which category do I need to be in to get a car loan?”
What Credit Score Do You Need to Buy a Car?
There is no one size fits all answer to this question as lenders do not all operate the same way. What is certain, however, is that those with a lower credit score will get higher interest and fees in whatever loan they secure.
Credit scores below 580 mean you are unlikely to get a reasonable loan; if your loan application is accepted by a lender, it will be subprime with extremely high-interest rates. It can be frustrating dealing with a bad credit car loan due to your credit score range.
Those in the lowest credit tiers are not the only ones challenged by the car loan process. Even those with a higher credit score can end up with interest rates that are often double what the best credit scores receive. While it may be possible to buy a car with any credit score, there is an ideal range you would want to be in if possible.
What is the Ideal Credit Score When Buying a Car?
If you want the best possible financing arrangement when purchasing a new vehicle, the ideal credit score is 700 or higher. The closer you are to 850, the better the offer from the lender.
To put this in perspective, only 20% of the population is in the 800-or-higher range when it comes to credit scores. The majority of car buyers fall below the 800 range, though the ones with scores between 700 and 800 are still in a fairly good position.
Lenders see these buyers with higher scores as prime borrowers, meaning the credit score reflects the likelihood the borrower will make loan payments on time and pay off the debt in full. There is less risk for a lender to offer auto financing to a consumer with a credit score of 775 than there is with a score of 600.
I Have Bad Credit: Does This Mean I Cannot Buy a Car?
Bad credit will not stop you entirely from purchasing a car, but it will not make it any easier. You are going to have a hard time negotiating if you are already going in with bad credit, and the loan you may be offered will be subprime.
On the other hand, lenders expect to have a percentage of subprime borrowers, and they know that even with the risk involved this is where the real money is made on their end—on high-interest loans.
Therefore, even as a buyer with bad credit, you can feel assured you still have a decent shot at securing car financing. Then it is up to you to make sure you can meet the loan obligations by making your monthly car payment so your credit score doesn’t get worse.
If you have a bad credit score and also need a car, you should weigh out every possible option before jumping into a high-interest loan.
Could you utilize public transportation for a period of time while working to improve your credit score?
Could you wait until you have saved up $5,000 or more for a down payment?
Could you have a family member co-sign the loan to reduce the monthly payment interest rates?
These are just some of the alternatives to consider to try and regain some financial footing that will ultimately help you improve your credit score.
In an ideal world, you will only sign on to a car loan once you have gotten your credit score up. However, if you absolutely need the loan now, look for a smaller bank or credit union for personalized service and an opportunity to discuss your specific scenario with a lender.