Before you head to the dealership for your new car, it is important to consider your credit score — and how it will affect how much you spend. Lenders use your credit score as an indication of how likely you are to repay a loan. This means that the higher your credit score, the more favorable your interest rate and terms will be.
In general, you’ll need a credit score of at least 600 to qualify for a traditional auto loan, but the minimum credit score required with vary from lender to lender. As interest rates increase due to inflation, securing a subprime auto loan may be more difficult — but not impossible.
Data from the year’s second quarter found that almost 13 percent of total financing fell into the subprime category. If your credit score falls into the subprime category, you may need to look for a bad credit car loan. These typically have higher interest costs than traditional auto financing.
What is the minimum credit score for a car loan?
Although there is no official minimum credit score that lenders require across the board in order to apply, you can expect minimum standards. These standards range based on lender specifics and are present in order to ensure that borrowers are lending to those who can confidently pay back their loans.
But the minimum credit scores to qualify for vary based on the lender and the car you intend to finance. Some lenders have a minimum requirement of 575 — falling into the very poor category.
All of this is to say, even with poor credit, you can find an auto loan for your needs. You just might need to do a bit more homework to get the best rate. And luckily, your credit score isn’t the sole measure used to determine your interest rate. Even though your credit score makes up a large portion of the pie, lenders will also consider your income, employment history and your debt-to-income ratio.
How credit scores affect auto loans
Lenders view your credit score as a numerical representation of how likely you are to repay a loan. The higher your credit score, the less risk lenders think you pose. This means that you are more likely to receive more favorable interest rates and better terms.
Consider the following aspects of vehicle financing that a strong credit score can provide you with.
- Better interest rates. Most obviously, a good credit score, usually a score of 680 or above, can ensure a low interest rate.
- Lower monthly payments. The more competitive your interest rate is, the less expensive your monthly vehicle payment will be.
- Smaller down payment. With the added layer of good credit, you likely can avoid making a large down payment. Though a down payment tends to be a smart move as it can lower your rate even more.
- Higher chance of approval. Lenders viewing you as less of a risk will mean you will be more likely to secure financing over a bad credit borrower.
Auto loan interest rates by credit score
Once you have a grasp on your credit score, it is helpful to understand what average auto loan rates people with your score receive. For some, it may mean working to fix your credit score ahead of application, while for others, it might be smart to focus solely on bad credit lenders.
Ways to get a car with bad credit
If you are looking to purchase a vehicle but fall into the bad credit category, it might be harder to secure a perfect loan, but it is not all bad news. There are still ways to get a car with bad credit, even if it means potentially higher interest rates.
Consider the following ways to secure a loan even without perfect credit.
- Look for subprime auto loans. These types of loans are viewed as a risk for lenders, so while they are available to those with poorer credit scores, they likely still carry high rates.
- Purchase with cash. If you have enough cash to cover the transaction, you can avoid the entire financing process.
- Work to improve your credit. If patience is on your side, using credit-building strategies can mean money saved in the future. Take steps like paying down your debts, not opening any new accounts or increasing your available credit.
- Look for errors. Take a deep look at your credit and see if there are any mistakes present that are dropping your score. Keep in mind that it can take up to 30 days to get errors corrected, so give yourself ample time.
- Consider a buy here, pay here dealership. Offering second-chance car loans, these dealerships should only be used if you cannot secure financing anywhere else. Outside of high rates, there will likely be high fees.
The bottom line
While your credit score serves as an important indicator for lenders considering your loan application, don’t let a bad score get in the way of a future purchase. Instead, remember that it is not the only approval factor, and there are simple steps you can take today to improve your credit. Start working on it now to improve your chances of a good rate when buying your next car.
