If it’s time to purchase a new vehicle, you may be wondering about one obstacle that could get in your way: your credit. Maybe you’re unsure how good your credit is and you don’t know what credit score is needed to buy a car either.
Unfortunately, there’s no simple answer to this question. No matter your credit score, you can probably find a way to finance a car loan if you absolutely must buy a new vehicle. The real question is what your credit score will cost you when you make the purchase. The better your credit score, the better your chances of getting a cheaper rate.
So while there’s no minimum credit score for a car loan, your credit history can make a big difference.
Bad Credit Scores Mean Much Higher Interest Rates
According to data from Experian Automotive, the difference in interest rates on a new car loan for someone with excellent credit versus someone with very poor credit is over 11 percentage points. In fact, 2.84% was the average interest rate someone with a super-prime (excellent) credit score paid in the first quarter of 2017, while those with deep subprime (very poor) credit paid an average interest rate of 13.98%.
To illustrate this difference, consider that you apply for a 60-month loan on a car that costs $25,000. With a 2.84% interest rate, the total cost of your car would be $26,847 with payments of $447 per month. Not too shabby.
For the same loan but an interest rate of 13.98%, your car loan would cost you $34,887, and you’d pay $581 per month. That’s more than $8,000 extra! Clearly, poor credit can result in you paying a lot more for your new vehicle.
The difference was even starker for those financing used cars. Those with super-prime credit paid an average rate of 3.56%, while those with deep subprime credit paid an average of 19.62%—more than 16 percentage points higher.
Average New Car Loan Rate by Credit Score (Q1 2017)
- Super-prime (781–850): 2.84%
- Prime (661–780): 3.77%
- Nonprime (601–660): 6.60%
- Subprime (501–600): 11.05%
- Deep subprime (300–500): 13.98%
Note that the credit labels above represent Experian’s credit ranges. Other credit reporting agencies use different scales and labels.
Average Used Car Loan Rate by Credit Score (Q1 2017)
- Super-prime: 3.56%
- Prime: 5.29%
- Nonprime: 9.88%
- Subprime: 16.48%
- Deep subprime: 19.62%
The dealer may also evaluate your credit using another type of credit score called VantageScore. VantageScore, which was developed by all three of the major reporting agencies, assigns different weights to different parts of your credit history, such as on-time payments, balances, and utilization. Some people may benefit from a lender using their VantageScore, while others may be at a disadvantage.
Where to Start If You’re Unsure
If you’re nervous about letting a car dealer check your credit—but even if you aren’t—it’s helpful to check your score yourself in advance. You can check your credit report for free to make sure you don’t have any surprises and to find mistakes.
Note that the credit score an auto lender uses may be a slightly different because it will be tailored for an auto loan. Still, it’s a good start—if your general credit score is strong, you can also bet that the score the dealer uses is strong.
We also recommend that you try to get pre-approved for a car loan from a bank or credit union before setting foot in the dealership. With a set interest rate in hand, if the dealer can offer you a better rate, perfect! If not, you’ll be prepared to pay what your bank approved you for.
A Word of Caution
Credit inquiries related to auto loans made within a short time frame (usually 14 days, or 45 days depending on the credit score model being used) are supposed to count as a single inquiry. However, some of our readers have found their credit scores dropping after multiple car dealers sent credit inquiries for financing. This is another reason why getting pre-approved before going to the dealership is a good idea.
If you still have questions about how your credit score can affect your car-buying decisions, check out our auto loan resource center, or visit one of the links below.
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