Owning a vehicle is a necessity for many people but buying a car is a big commitment. Vehicles can come with a hefty price tag, so there’s a good chance you might need to take out a loan to complete your purchase. When you apply for an auto loan, the lender will evaluate your financial information including your credit history and credit score.
There is no universalrule about credit score requirements for loan approval, but in general, the higher your score, the more favorable loan terms you will get. Learn how lenders use credit scores, other factors that determine creditworthiness, and what you can do to buy a car even if you have a low credit score.
What’s a Good Credit Score to Buy a Car?
There is no universal minimum credit score to buy a car, but in general, FICO scores between 670 and 739 and VantageScores between 661 and 780 are considered good. Anything higher would be considered an excellent score making you more likely to be approved for an auto loan.
Many lenders set their own minimum credit scores. If your credit score does not meet or exceed the lender’s minimum, your application for credit may be denied. It’s also important to note that the lower your credit score is, the higher your interest rate may be.
What Is a Credit Score and How Do Lenders Use It?
Credit scores offer lenders an overview of a potential borrower’s credit behavior including their current amount of outstanding debt and their history of making on-time payments. This helps the lender determine how much risk they’re taking on by offering a loan. Since lending to borrowers with low scores can be risky, lenders may refuse the loan all together or charge a higher interest rate to offset the extra risk.
FICO scores have the following score tiers:
- 300-579: poor credit score
- 580-669: fair credit score
- 670-739: good credit score
- 740-799: very good credit score
- 800-850: excellent credit score
VantageScore, another credit scoring system, has similar score tiers with slight variations:
- 300-499: very poor credit score
- 500-600: poor credit score
- 601-660: fair credit score
- 661-780: good credit score
- 781-850: excellent credit score
Federal law allows you to get an annual copy of your credit reports from each of the three major reporting agencies for free. However, these reports typically do not include your credit score. Instead, they show you your open lines of credit and credit balance, which is useful for ensuring that your information is accurate.
However, if you want to see your credit score to determine if you meet your lender’s requirements, you may be able to access your score through your bank or credit card companies. Otherwise, you may need to use a credit score service.
What Impacts Your Credit Score?
FICO and VantageScore each use their own formulas for calculating credit scores. However, both consider these 5 main factors:
- Payment history: This covers whether you consistently make on-time payments, miss payments, have accounts sent to collections, or have filed for bankruptcy.
- Length of credit history: The age of your oldest and newest accounts is a factor in your score, as well as the average age of all your accounts. Generally, the longer your credit history, the better.
- Credit usage: This is the percentage of your credit limit you’re using and the number of your accounts that have balances. Lower credit usage is preferable.
- Types of accounts: Credit scores consider whether you have revolving accounts (e.g., credit lines and credit cards), installment accounts (e.g., mortgages, auto loans, or personal loans), or a mix of both. Most lenders prefer to see a mix of both types.
- Recent activity: This examines whether you’ve recently opened or applied for new accounts.
As an example of the differences between how FICO differs from VantageScore in its score calculation, FICO puts a significant amount of weight on payment history and amounts owed, while VantageScore heavily weights a borrower’s total credit usage, balances, available credit, credit mix, and experience. The different weighting means that the same individual could have different credit scores from each credit reporting agency.
How to Improve Your Credit Score
If you’re concerned that you may not have the credit score needed to buy a car, there are some steps you can take to improve your credit rating. Here are a few to help you get started:
- Check your credit report: This can help you identify and correct any errors such as accounts you did not open or improperly recorded missed payments, which may be pulling down your credit score.
- Make your monthly payments on time: Commit to making at least the minimum payment on each account on time each month, since late payments can stay on your credit report for up to 7 years.
- Pay down your credit card balances: A low credit card utilization rate can boost your credit score, so consider paying down your balances if you can and avoid charging more.
- Only apply for credit when you need it: Applying for multiple accounts in a short amount of time may temporarily lower your credit score. If you’re planning to finance a vehicle, try to avoid opening other accounts around the same time.
- Build your credit: If you do not have any credit history or only a few accounts, you may benefit from opening a few accounts that report to the credit bureaus. However, take care to charge small amounts on these new lines and make your payments on time.
Other Factors That Impact Your Car Loan
Besides checking your credit score, lenders look at your overall finances and other factors. Here are a few things that may influence your credit offer.
Downpayment Size
The amount of your down payment may impact your interest rate and your ability to get approved. A down payment is the amount of money you pay upfront before borrowing more money. For example, you may pay for 20% of your car’s total cost as a down payment before borrowing money for the remaining 80%. While borrowers with excellent credit may be able to make a low down payment, you may need to make a larger down payment if your credit score is low.
Loan Terms
Many lenders allow you to choose from a variety of loan repayment periods, also known as loan terms. While longer terms allow you to make lower monthly payments, they may also come with higher interest rates, causing you to pay significantly more over time. No matter the loan term, make sure you can afford your monthly payments while trying not to extend the loan for longer than absolutely necessary.
Loan-to-Value Ratio
Your loan-to-value (LTV) ratio is the amount you want to borrow for your vehicle versus its current market value. If you’re taking out a smaller loan in comparison to the value of the vehicle, you have a lower LTV ratio and may get a lower rate on your auto loan as a result. Making a larger down payment or trading in another vehicle are both ways you may be able to lower your LTV ratio.
Debt-to-Income Ratio
A debt-to-income (DTI) ratio is a measure of the total amount of your monthly debt payments in relation to your monthly income before taxes. Borrowers with lower DTI ratios may be more likely to be approved and may also be able to get lower interest rates.
Other Discounts
Some lenders offer additional interest rate discounts, typically for doing things such as setting up automatic monthly payments or using their car-buying services. In addition to the dealer’s lending options, you may consider checking banks, credit unions, and online lenders to see what types of deals they may have available.
How to Buy a Car With a Low Credit Score
When you have a good credit score to buy a car, you may not have any trouble getting approved. However, even if your score is less than ideal, this does not necessarily mean you cannot purchase a vehicle. The following tips may help you with your car-buying journey.
Pick a Car Within Your Budget
If you’re trying to buy a car with poor credit, it’s important to choose a vehicle that you can realistically afford. Set your budget before you start shopping and commit to sticking to it, even if the salesperson tries to upsell you.
Remember that buying a less expensive vehicle also lowers the amount you need to borrow, and it may be easier to get approved for a small loan than a large loan. Your new car payment also raises your DTI ratio, which can further impact your ability to get approved.
Make a Big Downpayment
In some cases, coming to a lender with a larger down payment can show that you’re less of a risk. This may make your credit score less of a factor, increasing your chances of getting approved. A large down payment may also translate into better financing terms, lower interest rates, and more affordable monthly payments.
Get a Cosigner
A cosigner is an individual who is willing to share responsibility for your loan, essentially agreeing to take over payments if you default. When you have a creditworthy cosigner, the lender may be more willing to approve your application and offer you more favorable rates or loan terms. It’s common to ask a friend or family member with good credit to be a cosigner on a vehicle loan.
Reduce Your Debt-to-Income Ratio
You may be able to lower your DTI ratio by paying off current loans or refinancing some of your outstanding debt to create a lower total monthly payment amount. If this is not possible, consider getting a second job or picking up a side gig to increase your monthly income, which would further lower your DTI.
Commit To Improving Your Credit Score
If you’ve tried some of the above steps and are still unable to get approved for a vehicle loan, you may need to continue working to increase your credit score by improving in the areas discussed. This can take time, but once your score is in the higher ranges, you may have a better chance of being approved for a loan at a rate you can afford.