What’s a Good Credit Score to Buy a Car?

credit score needed to buy car

By Eric Rosenberg, MBA

If you are in the market for a new car and don’t have enough cash to pay for it in full, you are probably wondering if your credit score is good enough for an auto loan, much less one with good terms. While there is no specific minimum credit score to buy a car, your credit score is a huge factor in the financing approval process and your interest rate.

Your credit score matters a lot when buying a car. Let’s take a look at what you need to know about credit scores and car loans.

What’s a good credit score to buy a car?

There are two main factors lenders look at when approving an applicant for an auto loan. First, they look at their credit score and credit report. Next, they’ll look at the borrower’s income and debt-to-income ratio.

According to data from Experian in the third quarter of 2018, the lowest auto loan rates are reserved for people with a credit score above 780. Borrowers with a subprime credit score below 500 have a more difficult time getting approved for financing.

If approved, borrowers with subprime credit pay higher interest rates of about four to five times more for a comparable loan.

What credit score do you need for a car?

According to credit bureau Experian, a good credit score is 670 to 739. Very good scores range from 740 to 799. 800 to 850 scores are considered exceptional. Borrowers in the 800 range will have an easier time getting approved by a lender and qualifying for the best rates and loan terms.

For a new car, borrowers with top credit scores typically pay around 4% for a car loan. Subprime borrowers with poor credit may pay rates around 20% and have limited financing options. That’s a big difference in cost. Credit scores also come into play if you want to lease a car.

In addition to your credit score, other major impacts on the interest rate include the loan’s term, whether the car is new or used, and your debt-to-income ratio.

How your credit score impacts your monthly payment

The size of the loan is a big driver of the monthly cost. A higher down payment lowers your loan amount and monthly payment, and could even help you get a lower interest rate and annual percentage rate in some cases. As a general rule, it’s a good idea to borrow as little as possible to minimize your costs.

As an example, let’s look at a $10,000, 60-month loan for a new car, based on the following scenarios using data from Experian’s State of the Automotive Finance Market.

A borrower with a 700 credit score would pay around 4.5% interest. That would lead to $186 in monthly car payments and $1,185 in total interest costs.

At a 600 credit score, you would pay around 7.5%, which leads to a $200 monthly payment and $2,022 in total interest charges.

At a 400 credit score, if you can get approved, you’ll pay around 14.4% interest. This loan would lead to a $234 monthly payment and $4,085 in total interest. Credit scores make a huge difference!

With a bad credit score or a history of bankruptcy, your income is a much bigger factor. These don’t disqualify you from a car loan, but you can expect to pay more and may be required to put down a much larger down payment.

How to raise your credit score for a car loan

If you are worried about being subprime and getting approved or just want to save money with a lower interest rate, you can take action today to improve your credit score. First step? Check your credit report from the credit reporting agencies (you can get a free copy every 12 months from each bureau at annualcreditreport.com) to see where you stand and how you can improve your credit rating.

Be sure to build on-time payment history with the major credit bureaus and keep revolving credit balances low since they are the two most important factors in your credit score.

Once you get on the road, your credit score also influences your insurance rates, so it pays to keep improving your score.

If you are new to credit or have a bad credit history, consider a new credit account like a secured credit card or Self Credit Builder Account to establish and potentially improve your credit.

No one has to be stuck with bad credit. You’re in the driver’s seat and have the power to get on track for an 800+ credit score, and the very best rates around for a loan.

About the author

Eric Rosenberg is a former bank manager and corporate finance worker with a Bachelor’s degree and MBA in finance. His work is featured at Business Insider, Credit Karma, The Balance, Investopedia, and many other websites and publications.

Written on February 27, 2020

Self is a venture-backed startup that helps people build credit and savings.
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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