The idea of driving off a dealership lot in a shiny, new car is thrilling. But before that, understanding the dynamics of credit scores and their impact on auto loans can be a pain. We've broken everything down for you, to get you one step closer to your driving in style.
Here’s what we'll cover:
Conclusion? While you can't control how a specific lender evaluates your credit score, having a good-to-excellent FICO score can increase your chances of approval from various auto lenders.
Here at Homebody, we’ll unravel what you need to know about credit scores and car purchases in this simple guide. By the time you’re finished, you’ll know exactly what good credit score you’ll need to buy a car, how to fix your credit, and much more.
And if you need answers now, scroll down to the FAQ for the info you need on-demand.
Okay, ready to hit the road? Let’s go!
When it comes to buying a car, having a good credit score can significantly impact your financing options and the overall cost of your vehicle.
While specific credit score requirements may vary among lenders and dealerships, a good credit score for buying a car typically falls within the range of 660 to 720 or higher.
Here's a breakdown of credit score ranges and their implications for buying a car:
Ok, now that we’ve got that out of the way, it’s time to explain what car dealerships and lenders look at when approving or rejecting your car loan application.
Credit scores play a vital role in evaluating your financial health and ability to repay your loan. Your credit score is a metric that lenders use to gauge your reliability as a borrower. While different scoring models exist (such as the VantageScore), most lenders refer to the FICO score.
Different categories of credit scores exist, and Experian lists several types of scores specifically used for auto loans. Your FICO score may vary from your average credit score, and the loan amount along with your ability to make payments are key factors. Your auto scores can also differ from lender to lender, as each one weighs your credit history differently.
While there's no universal minimum credit score required for a car loan, your scores can significantly affect your ability to get approved for a loan and the loan terms
When lenders are evaluating your eligibility for car financing, they take into account a variety of factors beyond just your credit score. These factors help them assess your ability to repay the loan and manage your finances responsibly.
Here's a list of key factors that lenders consider in addition to your credit score:
As you can see, there’s a lot more to your car loan than just a credit score. It's important to note that different lenders may weigh these factors differently, and meeting the requirements can vary from one lender to another.
What’s the solution? Overall, it's a good idea to prepare by improving your financial health in ALL of these areas before applying for car financing. You’ll find that even paying off a miniscule debt can lead to a reduction in your overall interest and monthly car payment that pays off in the long-run.
Note: Scroll down through this article to the “What if I don't qualify for an auto loan?” section if you’re looking to find out ways to build your credit–especially by teaming up with Homebody!
Getting an auto loan when your credit isn't great is possible, but it's like taking the scenic route—there might be a few more bumps along the way.
Here’s an example:
Lower Credit Score
So, if your credit score isn't the best, you might be looking at an APR around 7.76% for a 60-month loan on a new ride. That translates to monthly payments of about $595, and over the course of the loan, you'll be shelling out a total of $5,695 in interest.
On the other hand, if your credit score is sitting firmly in the "bad credit" territory, the story changes a bit. Brace yourself for higher interest rates due to the lender's concern about the risk. Your monthly payments could surge to around $748 for that same 60-month stretch. Yep, that's quite a jump, and it's all because of your creditworthiness.
Sure, you can get that auto loan with bad credit, but it might come with some twists and turns. Just remember, this isn't the end of the road. There are ways to improve your credit score and navigate the financial highway with a bit more ease.
Technically, there is no minimum credit score for buying a car. However, the types of loans available to you will often have high interest rates, more limited financing options, and will typically be issued by “predatory” lenders (“buy here, pay here.”)
Predatory car lenders employ deceptive or exploitative tactics to take advantage of individuals seeking auto financing, often those with limited financial knowledge or poor credit. They may use tactics such as misleading advertising, high-pressure sales techniques, and hidden fees to lure borrowers into unfavorable loan agreements.
These lenders might offer loans that significantly inflate the total cost of the loan with:
By targeting vulnerable borrowers, these lenders aim to maximize their profits while trapping borrowers in cycles of debt and financial hardship. It's essential for consumers to be vigilant, read contracts thoroughly, and consider seeking advice from reputable sources to avoid falling victim to predatory car lenders.
When looking for an auto loan with bad credit, consider seeking options at community banks or credit unions for more affordable rates. These institutions often provide personalized assistance and can tailor financing plans to your specific needs.
Applying for credit with external lenders when your credit score is subpar is a risky move, especially if the loan gets rejected.
If you're unable to pay your car loan, it's important to address the situation promptly to avoid serious financial consequences. Here's what may happen if you find yourself struggling to make car loan payments:
Are you cruising straight into "Money Problems Land?" Not to worry. If you have problems paying your car loan and need some actionable tips ASAP, the following tips will point you in the right direction:
It's crucial to be proactive when it comes to a potentially dire loan situation where you just can’t make payments. Ignoring the issue completely and hoping for the best can lead to more severe financial consequences and impact your credit for years to come.
Facing a loan denial for an auto loan can be disappointing, but the situation isn't necessarily dire. Receiving a loan denial typically indicates that the lender has concerns about your ability to make timely payments.
However, there are steps you can take to mitigate potential credit challenges and improve your chances of obtaining a car loan in the future.
When planning for an auto loan, it's crucial to factor in the possibility of higher interest rates, especially if your credit score is lower. Financial experts recommend setting aside approximately 10% of your total transportation budget annually. This acts as a reasonable buffer to accommodate higher interest rates, ensuring that your overall transportation costs remain manageable.
Experian's research has shown that applicants with lower credit scores often finance smaller average amounts compared to those with higher scores. For example, individuals with lower scores might secure loans ranging from $29,000 to $35,000, while those with higher scores might qualify for loans ranging from $34,000 to $39,000. Calculating the potential impact of a loan at an affordable 4% interest rate can provide insight into how such a rate can positively affect your financial situation.
A cosigner for a car loan is a person who agrees to share responsibility for the loan and make payments if the primary borrower defaults.
Having a cosigner for your car loan can be incredibly beneficial, particularly if the cosigner has a better credit history. Lenders view cosigners as additional sources of responsibility for making monthly payments. This increased assurance can enhance your approval chances and potentially lead to securing a lower interest rate.
However, it's vital to understand that both the primary borrower and the cosigner share equal responsibility for making payments. If payments are missed or delayed, both parties' credit scores can be negatively impacted. Before involving a cosigner, ensure that both parties are fully aware of the financial commitment and the potential implications.
Paying your bills on time is one of the most effective ways to positively impact your credit score. Set up reminders or automate payments to ensure you don't miss any deadlines.
And if you have some extra money, make sure to pay more than the minimum each month. Not only does this pay down the interest and principal of the loan, but you also build more credit history and show lenders that you’re capable of more credit in the future.
Each time you apply for credit, a hard inquiry is recorded on your credit report. Applying for a car loan typically results in a hard inquiry on your credit report, which can temporarily lower your credit score.
Therefore, limit the number of credit applications you submit when actively seeking a car loan, as multiple inquiries within a short period can negatively impact your score.
Lowering your overall debt load can enhance your credit score. Focus on paying down existing debts, such as credit card balances and personal loans. Even tiny debts that are less than 7 years of age can cap off your credit score until you make payments or it expires.
You can obtain your credit report for free through the three credit bureaus, all of which will give you the information you need to contact lenders, resolve the outstanding debts, and ultimately bring your credit history into good standing.
Regularly review your credit reports for inaccuracies or errors. Dispute any discrepancies you find to ensure that your credit report accurately reflects your financial history.
Looking to boost your credit score while managing your rental commitments? Homebody has you covered with innovative credit-building options that not only enhance your creditworthiness but also offer additional benefits for your financial well-being.
Explore our offerings below to see how you can elevate your credit while simplifying your rental experience.
Explore Homebody today for all of our credit building services and the most affordable insurance you’ll find online!
A credit score is a representation of your creditworthiness (numerically), indicating how likely you are to repay any borrowed money. When buying a car, lenders will use your credit score to decide on the risk of lending to you. If you have a higher credit score, that can lead to more favorable loan terms, such as better financing options or lower interest rates.
Your credit score significantly influences the interest rate you'll receive on a car loan. Generally, individuals with higher credit scores qualify for lower interest rates, which can save you a substantial amount of money over the life of the loan. On the other hand, lower credit scores might result in higher interest rates, increasing the total cost of your car purchase.
The specific credit score needed to buy a car can vary depending on the lender and the type of loan you're seeking. Generally, a credit score of 600 or higher is considered acceptable for securing an auto loan. However, higher scores increase your chances of obtaining better terms and lower interest rates.
Yes, you can buy a car with bad credit, but you might face challenges in securing favorable loan terms. Lenders may offer subprime auto loans for individuals with lower credit scores, but these loans often come with higher interest rates. It's important to research and compare lenders to find the best option for your situation.
Improving your credit score before buying a car can lead to better loan terms. Start by paying bills on time, reducing outstanding debts, and checking your credit reports for errors. Minimize new credit applications and focus on responsible credit management to boost your score over time.
Getting pre-approved for a car loan can provide several benefits. Pre-approval gives you a clearer understanding of your budget and the interest rate you can expect. It also streamlines the buying process by providing a price range to work within while negotiating with dealerships.
Dealerships access your credit score to determine the loan options available to you. They may work with multiple lenders to find the best financing solution based on your credit profile. It's essential to be aware that dealerships can sometimes mark up interest rates, so it's wise to know your credit score and understand the loan terms you qualify for beforehand.
Trading in your old car with a low credit score is possible, but the trade-in value and loan terms might not be as favorable. Lenders may consider your trade-in value as part of the down payment, helping you secure a loan even with lower credit scores. However, be prepared for higher interest rates and potentially longer loan terms.
Yes, you can buy a car with no credit history, but it might require more effort. Lenders may consider alternative credit data, such as rent and utility payments, when evaluating your creditworthiness. Additionally, having a steady source of income and a cosigner can enhance your chances of approval.
When shopping for a car loan, multiple inquiries within a short period can impact your credit score. However, if you apply for auto loans within a specific timeframe (usually 14-45 days), they are typically treated as a single inquiry, minimizing the potential negative impact on your score.
If you’ve read up to this point, consider yourself mentally prepared to get the car loan you’ve been looking for. While buying a car is possible with almost any credit score, a good score unlocks favorable loan terms and rates–and it’s easier than you think. That being said, if you take the right steps, you’ll be driving your dream car in no time.
At Homebody, we advocate for financial awareness and proactive credit management, ensuring you get behind the wheel on the best terms possible. Whether you’re looking for guides to help you along the credit-building process or just want to learn about our insurance offerings–including renters insurance and pet insurance–get a quote today!