What is the minimum credit score required for purchasing a vehicle?
In 2023, nearly 80% of new car buyers and almost 38% of used car buyers financed their purchases, according to Experian.
Your credit history plays a crucial role in determining whether you'll be approved for a loan and the interest rate you'll receive. However, lenders calculate credit scores differently for auto loans compared to credit cards, mortgages, personal loans, and other types of debt. Understanding how your score is calculated and what score to aim for can help simplify the process and reduce confusion.
Credit scores for car loans
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How your credit score impacts car loans
Lenders frequently employ two distinct credit-scoring models to assess borrowers: the FICO® Score and the VantageScore®.
While many lenders use FICO Score 8 and 9 or VantageScore 3.0 for car buying, there is also a lender-specific score, the FICO Auto Score, which ranges from 250 to 900, compared to 300 to 850 for the base FICO score.
Car payment history is factored into Auto Score, which is optimized for specific credit products.
Before applying for a car loan, it's important to inquire about the credit scoring system used by the lender.
You can check your FICO Auto Score using MyFICO, which offers both a free and paid version with additional features such as specific scores for mortgages and auto loans and $1 million identity theft insurance.
Other online resources can provide you with your credit scores, although they may not be as specialized in auto financing. These resources can help you understand the interest rates you may qualify for.
What credit score do I need for a car loan?
In the auto finance market, borrowers are classified into five categories based on their creditworthiness, with Experian being the company that uses this system.
- Super prime: 781 to 850
- Prime: 661 to 780
- Nonprime: 601 to 660
- Subprime: 501 to 600
- Deep subprime: 300 to 500
In the second quarter of 2024, approximately 80% of buyers were classified as prime or super prime, according to Experian. The average credit score for new vehicle buyers was 753, while used car buyers had an average credit score of 689.
Since 2019, the average scores for new and used cars have been steadily increasing. In 2019, the average score for a new car was 737, while the average score for a used car was 655.
Using the myFICO loan calculator with September 2024 data, we can determine that a borrower with a credit score between 720 and 850 who borrows $40,000 over 60 months will have an average annual percentage rate (APR) of 7.45%. This equates to a monthly payment of $801, with a total interest cost of $8,034 over the life of the loan.
If your credit score is between 500 and 589, you will be charged an average APR of 17.774% and pay $1,011 per month, with a total interest of $20,650. On the other hand, if you improve your credit score to between 590 and 619 before applying, you can save approximately $1,140 over the course of your loan.
How to get a car loan with bad credit
Obtaining an auto loan with poor credit may be more challenging, and your interest rate may be higher, particularly if you fall under the subprime or deep subprime category.
If you have bad credit, here are some tips for getting approved:
Shop around
To find the best lender, compare rates and terms, but remember to consider administrative or origination fees that may differ among lenders.
If you have poor credit, Capital One Auto Finance is a great option due to its competitive rates and Auto Navigator tool, which allows you to search for cars and obtain pre-approval without a hard credit check.
Look for subprime or second-chance car loans
If you're unable to secure traditional financing from a dealer or bank, consider a subprime lender that specializes in financing for individuals with poor credit.
You can purchase a car with "Buy here, pay here" lots or opt for an online marketplace like Autopay for subprime car loans, but be prepared for higher interest rates and fees due to the increased risk involved.
Get a co-signer
If the primary borrower fails to make payments, the co-signer will be legally responsible for the debt. Having a co-signer with a good credit score can increase the chances of getting approved for a loan with a lower interest rate. However, not all lenders accept co-signers, so it may be necessary to shop around. It's important to ensure that the co-signer fully understands the obligation they are agreeing to.
How to improve your credit score
There are methods to enhance your credit score to qualify for a lower interest rate on an auto loan.
Pay your bills on time
Your credit score is significantly influenced by your payment history, which accounts for 35% of FICO's overall calculation. Making timely payments, particularly when you pay the full balance, can positively impact your credit score.
Keep your credit utilization down
Your credit utilization rate, which is the percentage of available credit you're using, has a significant impact on your FICO score. If you're using $5,000 of your $10,000 credit limit, your credit utilization ratio is 50%. Lenders generally prefer a credit utilization rate of 30% or less on revolving credit accounts.
Keep your oldest credit card open
Maintaining your oldest credit cards and avoiding new ones can positively impact your FICO score by increasing the average age of your accounts.
Be an authorized user on someone’s account
Having a family member or friend with good credit add you as an authorized user on their credit card account can help improve your credit score. When you are added to the account, it will be reported on your credit report, and if the primary cardholder has a history of responsible card usage, it will positively impact your credit score.
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