What credit rating is needed to buy a car? – Councilor Forbes
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Buying your own car can unleash a feeling of freedom that is hard to get elsewhere. But before signing on the dotted line, you will need to meet the minimum credit score requirements to qualify for a car loan.
It can be difficult to know if you have the right credit rating to buy a car. After all, there are many different credit scores and each lender has their own requirements. Even if you are not able to qualify on your own, you can often qualify for a car loan if you have a co-signer with good credit. Here’s what you need to know.
What Credit Ratings Do Auto Lenders Use?
The FICO score is the most common credit score used by lenders, with 90% of major lenders using it, according to FICO. This is a general purpose credit score with multiple versions (FICO Score 10 is the most recent version, for example). There are also industry specific scores, including one for the auto loan industry. Industry specific scores also have different versions, such as the FICO Auto Score 10.
Each lender makes their own decision regarding the credit score model they use. Unless you ask potential lenders what credit score they’re checking for, you won’t know. That’s why it’s usually best to check your General Purpose FICO score if you want to check your credit score before applying for a loan, which we recommend.
What credit rating is needed to buy a car?
There is no single official credit score for buying a car. Instead, each lender sets their own criteria, so there may be different thresholds for different lenders.
Having said that, it is certainly easier to get approved for a car loan if you have a good credit rating. The lower your credit score, the harder it can be to find a lender, and if you do, you’ll usually pay a lot more for financing. This is why most of the people who end up taking out an auto loan have a good or an excellent credit score.
According to the State of the Automotive Finance report from Experian for the second quarter of 2021, here’s how many people got auto loans in the different credit rating ranges:
The lower your credit score, the lower your chances of buying a car. If your credit score requires a lot of work, it can be difficult to find a lender who will approve you for a car loan.
When to use a co-signer
If you are unable to qualify for an auto loan, you may need to find a co-signer with better credit.
However, it’s usually best not to use this option if you can help it, as it’s a big deal to get someone to co-sign your loan. You are basically asking them to pay off your auto loan for you if you are not able to do so for some reason. If this happens, you could end up burning your relationship down, and no one wants it.
But if you have a loved one who trusts you, is in a better financial situation themselves, and is able and willing to help, it can be the difference between getting a car or not.
How Does Your Credit Score Affect Your Loan Costs?
Your auto credit score has a big impact on the amount you pay for a loan. Take a look at this graph of the average auto loan interest rate by credit score for the second quarter of 2022, according to Experian:
The difference between 20.58% and 3.66% may not seem huge at first, but let’s see how it affects the amount of interest you pay over the life of the loan. If you buy a car for $ 25,000, put $ 5,000 down and pay it off over five years, you’ll pay $ 1,916 in interest when that car is paid off with good credit.
However, with bad credit, you’ll end up paying $ 12,181 in interest by the time you pay it off – more than half the price of the car itself.
How to improve your credit score before buying a car
If you don’t yet have a perfect credit score, don’t worry – you’re not alone. There are many steps you can take to improve your credit score before applying for a car loan. Here are some things you can do to increase your score relatively quickly:
- Catch up on the repayment of all overdue debts.
- Check your credit report and dispute any inaccurate notes on your file.
- Pay off as much revolving debt (credit cards and other lines of credit) as possible.
- Avoid strict credit checks, such as applying for new credit or new services.
- Avoid closing old credit cards that you don’t use, as long as they don’t have an annual fee.
- Ask for credit limit increases on your credit cards (and don’t use that extra credit if it’s not needed.
Here are some things you can do to improve your credit score over the long term:
- Always pay your bills on time: set up automatic payment so you’re afraid of forgetting.
- Open new types of loans and credits as needed, like student loans or credit cards, to diversify the types of credit you have.
Building your credit score at a level that qualifies you for an affordable car loan can be time consuming in some cases. But it’s worth it because you’ll be able to get the best car you can get for a price that won’t drain your bank account.
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