The recommended credit score needed to buy a car is 660 and above. This will typically guarantee interest rates under 6 percent.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Buying a car with cash is an incredibly straightforward transaction. However, for most Americans, financing is the more common approach to purchasing a vehicle. And, unfortunately, financing is where the process can get complicated.
Auto lenders use a consumer’s credit score to determine loan eligibility, interest rates, loan terms and monthly payments. So, what credit score is needed to buy a car? Well, while a score of 660 and above is generally recommended, there’s good news even if your score is below this number. Generally speaking, just about any credit score can get approved for an auto loan—the terms will just be less favorable.
What credit score do car dealers use?
There are two credit scoring models available: FICO® and VantageScore®. It’s important to understand that your credit score may vary slightly between the two models. Both of the latest models, FICO 8® and VantageScore 3.0®, use the same five factors to calculate your score (payment history, amounts owed, length of credit history, new credit and credit mix). The difference comes from what weight the models give each factor. For example, while payment history makes up 30 percent of FICO® credit scores, it accounts for 40 percent of VantageScore credit scores.
If you have slightly different scores between the two models, you can ask your potential lender which scoring model they typically use. This will help you estimate what kind of score they’ll see when they check your credit.
Additionally, auto lenders may opt to use the industry-specific FICO Auto Score®. This score takes your traditional FICO® Score and adjusts it after considering auto data. As a result, lenders get a more specific score that speaks to the consumer’s chances of making auto payments reliably. While the FICO 8® scoring model ranges from 300 to 850, FICO Auto Scores® range from 250 to 900.
How does your credit score affect your auto loan rates?
Depending on what credit score you have, you’ll fall into a credit category ranging from deep subprime (the lowest) to super prime (the highest). As you climb up in these categories, you can be granted better interest rates and loan terms.
Let’s look at an example. Currently, the interest rate for a new auto loan for someone with a deep subprime credit score is 13.97 percent. In comparison, someone with a super prime credit score can expect an interest rate of 3.24 percent for a new car. If both of these people take out a seven-year car loan on an $18,000 car, the deep subprime lender will pay $10,310 in interest over the life of their loan. However, the super prime consumer will pay only $2,142. In this scenario, having a bad credit score costs the individual more than 4.5 times in interest.
Average auto loan rates by credit score
Credit score | Average loan rate for a new car in 2020 | Average loan rate for a used car in 2020 |
Super prime (781-850) | 3.4% | 4.08% |
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Prime (661–780) | 4.21% | 6.05% |
Nonprime (601–660) | 7.14% | 11.41% |
Subprime (501–600) | 11.33% | 17.78% |
Deep Subprime (300–500) | 13.97% | 20.67% |
In 2021, 65 percent of all cars (used and new) financed were to consumers with a credit score in the “prime” category. Individuals financing with a subprime score accounted only for 2.31 percent of purchases in 2021.
How does your credit score affect your car insurance premiums?
Car insurance companies use an Auto Insurance Score (AIS) to determine your insurance premiums and rates. Your AIS is meant to indicate the likelihood of you getting into a car accident and filing a claim. The higher the risk, the higher your insurance rate and premium.
Your AIS is made up of three factors: your driving record, your auto claims history and your credit score. It surprises most people to know that the credit score is given the highest priority in the calculation. However, multiple studies have found that there’s a correlation between driving risk and credit history. In particular, insurers are looking to see how much financial liability the consumer has taken on in the past and how they’ve managed it.
So, a low credit score can cost you more in buying a car, and it can drive your insurance premium up as well. In fact, some car insurance companies may deny you coverage if your credit score is too low. Note that not all car insurers use AIS, but the majority do.
Tips for getting a car loan with bad credit
As mentioned earlier, it’s entirely possible to get a car loan with bad credit. You might just have to take some additional steps to get approved. Here are some tips for getting a car loan with bad credit:
Know how much you can afford beforehand and be prepared to pay more. It’s very likely that you’ll be getting a high APR with poor credit. This interest rate will drive up your monthly payment by as much as a couple hundred dollars. Knowing this, you may have to go with a longer loan term to reduce the monthly payment or opt for a cheaper vehicle.
Save for a (larger) down payment. Knowing that your interest rate will likely be quite high, it can help to have a larger down payment. A down payment will increase the likelihood of you qualifying because the risk to the lender is minimized. Additionally, the down payment decreases the total amount you’re borrowing and helps keep your monthly payments more manageable.
Get a cosigner. If you can have someone with good credit cosign the loan, you’ll be more likely to qualify and receive a better interest rate. Note that your cosigner will be held liable if you lapse on car payments, so it’s a lot to ask of someone.
Go to the right lender. There are plenty of auto lenders that specialize in lending to those with poor credit. Note that these lenders typically offset their risk by offering high interest rates. So, after finding these lenders in your area, shop around between all of them until you find the one with the best rate. Make sure not to allow multiple lenders to pull a hard inquiry into your credit, as numerous hard inquiries will lower your credit score even further.
Check your credit reports. Many Americans unknowingly have mistakes on their credit report that are dragging down their credit scores. Before you go car shopping, take a moment to evaluate your credit report. If you find false or incorrect negative items, you can dispute them to potentially get them removed from your report.
Take other steps to improve your financial situation. Before you take on another financial obligation, it might be a good idea to make sure you’re in a good financial place. For example, you can take a few months to make responsible financial choices to give your credit a boost. Some actions that may help your credit include cutting down on revolving debt, making payments on time and keeping credit utilization below 30 percent.
How does a car loan affect your credit?
Having a car loan will contribute to two factors that make up your credit score: payment history and credit mix. If you make your payments on time and in full, it builds a pattern of good payment history and your credit score goes up. However, if you miss or make late payments, your credit score will go down.
A car loan is an installment loan, which adds variety to your credit mix. Most people only have credit cards (which is revolving credit) until they get a mortgage, a car loan or a student loan. When you have both revolving credit and installment loans, it shows a healthy credit mix. Lenders can see you’re able to handle different types of financial responsibilities.
With the boost to your payment history and credit mix, a car loan can be a tool that helps you build credit.
You may not have to wait years for your credit to improve. The credit consultants at Lexington Law Firm can work with you to ensure your credit report is a fair representation of your credit history. Together we’ll examine your credit for false negative items, help you dispute any mistakes we find and help you assert your right to an accurate report.