You don’t need a magic credit score to get a car loan. Most people and most credit scores, good or bad, can get one. The catch is that generally, a lower score means paying a higher interest rate for the loan, and more of your monthly payment goes towards paying the loan rather than the car.
Related: How to get a car loan
This is because your credit score tries to measure your creditworthiness as a borrower, that is, how likely you are to keep up with payments and make them on time. A low score means the lender is taking on more risk and will want to be paid more interest. It could also mean you’ll have fewer options for lenders and potentially tighter loan terms from those who approve you.
A better question might be what credit score do you need to get a quite well loan, even if you can’t get the best rates reserved for impeccable credit scores? A score that is just average should be fine.
Know the Score
Beyond the general rule that a lower credit score equals a higher interest rate, things get a little complicated. For starters, you don’t just have a credit score. Your score may vary among the three largest national credit reporting agencies: Experian, Equifax and TransUnion. They track things slightly differently on different timelines, and not all of your lenders may show up on all three. Agencies use information from your credit file to generate a three-digit credit score using models that also vary – the FICO and VantageScore models are the most common, with more lenders using FICO. They also offer specific sub-models tailored to specific loan types.
Basic FICO scores range from 300 to 850 and classify creditworthiness as poor (below 580), fair (580 to 669), good (670 to 739), very good (740 to 799) and outstanding (800 and above) . The FICO model describes good scores as “close to or slightly above the average US consumer.” According to Experian, the average FICO score for Americans in 2020 was 710, and two-thirds of Americans had a score of at least 670.
An average score is always good
An average score can still qualify for a relatively inexpensive loan compared to higher tiers. Experian reported that for the fourth quarter of 2020, the average new car loan rate for scores of at least 661 was only about 1 percentage point higher than the interest rate for scores above 780. On used car loans, which have higher rates overall, the spread was still less than 2 percentage points.
To put a dollar percentage point difference, a $30,000 loan on a new car for 60 months at 3% equals $539 in estimated monthly payments, with $2,340 in total interest paid over the life of the loan. At 4% for 60 months, the payment would be $552 and the total interest would be $3,120. You can compare the costs of different fares you may be offered using Cars.com’s car loan calculator.
Below this average level, however, interest rates begin to rise. Loans may also have more restrictive requirements on down payment, maximum loan amount and loan term, and the choice of lenders will be more limited. Experian reported that average used car rates for scores below 600 were nearly 13 percentage points higher for scores above 780 and about 16 percentage points for scores below 500. Nevertheless , these scores did not mean buyers could not get any loans at all. Experian reported that during the same period, borrowers with these credit levels still accounted for about 18% of new and used vehicle loan transactions. See more details on get auto loans with spotty credit.
Getting your credit report is free
To know what to expect when shopping for a loan, you need to know your credit scores, and it’s free to check them. Under federal rules, you can get a free credit report from every reporting agency every 12 months, but during the COVID-19 pandemic, Equifax, Experian, and TransUnion have made a free check available once a week. . This service was recently extended through April 2022, and all three scores are available at a combined site. Getting your report can also allow you to see areas to work on if you’re trying to increase your score for a better loan, as well as spot and dispute mistakes. The Federal Consumer Financial Protection Bureau has resources on credit reports, improving credit scores and detecting errors.
But it’s not all in the score
A credit score is a major factor in your rates and loan choices, but it’s not the only criteria. Lenders consider more than your score. The typical full loan application (which you’ll likely end up filling out, even if you start with a shorter online form) will ask for information such as your job(s), how long you’ve had them, and your monthly income. . Also be prepared to answer whether you own or rent your home and how long you have lived there. Applicants with lower scores might need to provide more details, such as assets, bank accounts, and monthly expenses, including things like child support. Depending on the answers, this additional information could make you appear to be a lower risk than your score alone would indicate, helping you get a better loan.
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Buy a bargain
Regardless of your credit rating, shopping around for the best loan deal is key, not just for the car. Set a budget for the vehicle, then shop around for loan terms. It’s a good idea to start with a credit union or bank where you have an account. Get quotes from more than one lender and try to have a pre-approved offer in your pocket before you buy the car. So you won’t have to depend on the financial department of the car dealership or manufacturer unless they make you a better deal.
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