When shopping for a new car (or a new car for yourself), it’s easy to get caught up in the excitement of four new wheels on the road. Maybe you’re thinking about the convertible you’ve always dreamed of owning, or maybe you’re just upgrading your minivan after two young children wreak havoc on your first one.
Car buyers are easily drawn to the latest bells and whistles on a car, and we quickly fall for things like heated seats, satellite radios, and even the plethora of cup holders (you can never have too many). With all the excitement, it’s easy to overlook the obstacles we may face when obtaining a car loan, whether through dealer financing, an auto lender, or a bank loan.
The dream of putting the roof up and sailing on a sunny day can quickly be overwhelmed by a declined or non-viable loan, and in many cases, the outcome may depend on your credit score. A good credit rating is an important factor in auto loans. But how can you be sure if you have good credit, bad credit, or a high credit score? Here, we’ll explore how high that score needs to be for a car loan to be viable.
How does the credit score work?
If you’re shopping for a car, you need to know how credit reports and credit scores work, as well as your current credit rating.
There are tons of credit bureau options on the market today where you can find your score. If you don’t currently have one, you can get a free credit report at annualcreditreport.com.
Your fico score (or credit score) is divided into five categories:
300-579: very poor
Borrowers in this range are often turned down by lenders. If approved, they may get a bad credit car loan and have to pay some sort of up-front fee, a higher interest rate, or an up-front deposit to get the loan.
Borrowers who fall into this category are sometimes called «subprime borrowers.»
Within this range, borrowers are more likely to get loan approval, but they don’t always get the best rate on the loan term.
740-799: Very good
This category finds borrowers who receive much better interest rates on the loans.
This is the ideal situation for borrowers (and lenders who are confident that the money will be repaid). Here, you are considered a primary borrower or a super primary borrower.
Now that you know how lenders view scores, you may be wondering, «What category should I fall into to get a car loan?»
What credit score do you need to buy a car?
There is no single answer to this question because not all lenders work the same. However, it is certain that people with lower credit scores will receive higher interest rates and credit rates.
A credit score below 580 means you are unlikely to get a reasonable loan. If the lender accepts your loan application, it will be a high-risk loan with an extremely high interest rate. Dealing with a bad car loan because of your credit score can be frustrating.
People with the lowest credit scores aren’t the only ones facing the auto loan process. Even those with the highest credit scores tended to end up with interest rates twice as high as those with the best credit scores. While it is possible to buy a car with any credit score, you want to have an ideal range if possible.
What is the ideal credit score when buying a car?
If you want the best financing for your new car purchase, the ideal credit score is 700 or higher. The closer you get to 850, the better the lender’s offer.
To put this in perspective, only 20% of the population is in the 800 or higher range when it comes to credit scores. Most car buyers have scores below 800, although those with scores between 700 and 800 are still in good shape.
Lenders view buyers with higher scores as primary borrowers, which means that credit scores reflect the likelihood that a borrower will repay the loan on time and pay off the debt in full. Lenders that offer auto financing to consumers with a credit score of 775 are less risky than consumers with a credit score of 600.
I have bad credit: does that mean I can’t buy a car?
Bad credit won’t completely stop you from buying a car, but it won’t make it any easier for you. If you have started to have bad credit, it will be difficult for you to negotiate and the loan you may obtain will be high risk.
On the other hand, lenders want a certain percentage of high-risk borrowers who know that, even with the risk, this is where they really make money: high-interest loans.
So even as a buyer with bad credit, you can be sure you still have a good chance of getting auto financing. Then it’s up to you to make sure you can meet your loan obligations by making monthly car payments so your credit score doesn’t deteriorate.
If you have bad credit and also need a car, you should weigh all your options before applying for a high-interest loan.
- Can you use public transportation for a while while you improve your credit score?
- Can you wait until you save $5,000 or more for a down payment?
- Can you ask a family member to sign a loan to reduce the interest rate on the monthly payments?
These are just a few of the alternatives to consider when getting back on the financial footing that will ultimately help you improve your credit score. Ideally, you would not apply for a car loan until you have a credit score. However, if you absolutely need a loan right now, look for the personalized service of a smaller bank or credit union and the opportunity to discuss your specific situation with the lender.
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