According to Experian, a good credit score to buy a car is 660 and above. The good news: there’s no minimum credit score required to buy a car. The bad news: if you have a low credit score and you need an auto loan, you’re going to be offered high interest rates.
Nearly 44 percent of all car loans went to people whose scores were below 660—and 3.5 percent to people who had scores below 500.
Which means that even if your credit isn’t where you want it to be, it’s still possible to get approved for financing on a new or used car. But the lower your credit score is, the worse your financing options are going to be.
Here’s what to expect for an auto loan interest rate, based on your credit score:
What can a few percentage points cost you? A lot.
Here’s an example: you want to buy a $36,718 car (the average price of a new car in the U.S. according to Edmunds).
If you were to finance a car at that price with an average credit score of 720 (Prime), you’d qualify for an interest rate of about 5.17 percent. Assuming you put down 10 percent upfront, your monthly car payment would be $626 and the total amount you would pay on a 60-month loan would be $37,571.
But if your credit score was 550 (an average Subprime score), you’d qualify for a much higher interest rate of 12.2 percent. This would raise your monthly payment by $112 and increase the total amount you’d pay on the loan by $6,734. (Yeesh).
If your credit score isn’t where you want it to be, remember that people with low scores are still regularly approved for auto loans, and there are alternative options you can try if you need to buy a car.
Thankfully, auto lenders won’t just look at your credit score, they’ll look at a few other factors as well. There are five different factors that make up your score:
Someone who has a 25-year track record of paying their mortgage and car payments on time could still be approved since they have a history of reliability—even if they also have a low credit score.
On the flip side, a person with the same score but only five years of credit history and a record of missed payments might not be approved.
So, before you apply for financing at the dealership, think through the positives of your financial situation relative to your score and how it’s calculated. You might have a case for approval, even if your score isn’t great.
The more you put down upfront, the lower your monthly car payment will be and the less you will pay in total for the entire loan.
In fact, if you buy a $36,718 car with a Subprime credit score and increase the down payment from 10 percent to 20 percent, you save $82 per month and $4,922 on the total loan.
Having a cosigner with a higher credit score on your loan can potentially help you get approved at a lower rate. But it does mean that they’re equally responsible for the loan.
Note: you may be able to remove the cosigner from your loan if you improve your score and opt to refinance.
This isn’t a great option, but, if you need to purchase a new car right now and your score isn’t where you want it to be, you can choose to buy at a higher rate and work on your score with the goal of refinancing later.
If you want to boost your score before buying a car, you can focus on improving the factors that it’s calculated from.
Payment history is the largest part of how your credit score is calculated. And although a delinquent payment can stay on your credit report for up to seven years, recent behavior carries more weight than past behavior.
The most important thing you can do to improve your score for the future is to start paying your bills in full and on time, every time—including any outstanding balances you have currently.
This includes your phone bills, utility bills, rent, student loans, credit cards and more. If you’re struggling to pay your bills on time, try:
Credit utilization, or the percentage of your total credit being used at any given time (across all of your accounts) is the third element of your credit score.
To keep your credit utilization low, focus on keeping balances low. Asking for a credit limit increase may be an option as well. Credit cards that are open but not in use can help your credit utilization ratio, so it’s best not to close them if you’re trying to boost your score.
That being said, you shouldn’t go open a few new ones to increase your credit limit—opening new lines of credit puts a hard inquiry on your credit report which can lower your score. They can also remain on your report for up to two years.
There’s this common misconception that once something is on your credit report, it’s not coming off.
Thankfully, that’s false.
Creditors are required by law to stop reporting inaccurate items to credit reporting agencies if they can’t prove their validity, so it’s important to check your credit report and dispute any inaccurate, unfair items you find.
Removing inaccurate, negative items from your credit history is one of the fastest ways to boost your score.
Each person’s credit history is different, which makes it difficult to say how long it takes to repair without reviewing your credit report.
If you want to learn more about how to improve your credit quickly and get a better interest rate on an auto loan, contact a trusted credit repair agency (like us!).
The bottom line is: your credit score won’t prevent you from buying a car.
When buying a car, your credit score is important only if you need a loan to finance your purchase. If you do have a low credit score, it doesn’t mean that you can’t get a car. But it may mean that you’ll need to buy a cheaper car, pay for a car without a loan, or pay higher interest rates.
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