Credit Score

What credit score do you need for a car loan? | New illustration by Paul Dolan

You don’t need a magical credit score to get a car loan. Most people and most credit scores – good or bad – can get one. The catch is, typically, a lower score means paying a higher interest rate for the loan, and more of your monthly payment goes towards paying off the loan rather than the car.

Related: How to get a car loan

This is because your credit score attempts to measure your creditworthiness as a borrower – the likelihood that you will keep up with payments and make them on time. A low score means the lender is taking more risk and will want to be paid more in interest. It could also mean that you will have fewer options for lenders and potentially stricter loan terms compared to those who approve you.

A better question might be what credit score do you need to get a pretty good loan even if you can’t get the best rates reserved for impeccable credit scores? A fair average score should be fine.

Know the score

Beyond the general rule that a lower credit score equates to a higher interest rate, things get a bit tricky. To begin with, you don’t have that a credit score. Your score may vary among the three largest national credit bureaus: Experian, Equifax, and TransUnion. They track things slightly differently on different schedules, and not all of your lenders may report to all three. Agencies use information from your credit report to generate a three-digit credit score using models that also vary – the FICO and VantageScore models are the most common, with more lenders using FICO. They also offer specific sub-models tailored to specific types of loans.

Basic FICO scores range from 300 to 850 and rank credit worthiness as poor (less than 580), fair (580 to 669), good (670 to 739), very good (740 to 799) and exceptional (800 and above) . The FICO model describes good scores as “close to or slightly above the average for American consumers”. According to Experian, the average FICO score of Americans in 2020 was 710, and two-thirds of Americans had a score of at least 670.

An average score is always good

An average score can still qualify for a loan at a relatively low cost compared to higher levels. Experian reported that for the fourth quarter of 2020, the average new car loan rate for scores of at least 661 was only about 1 percentage point higher than the interest rate for top scores. to 780. On used car loans, which have higher rates overall, the spread was still less than 2 percentage points.

To put a percentage point difference in dollar terms, a $ 30,000 loan on a new car for 60 months at 3% equates to $ 539 in estimated monthly payments, with $ 2,340 in total interest paid over the life of the loan. . At 4% for 60 months, the payment would be $ 552 and the total interest would be $ 3,120. You can compare the costs of the different fares that may be offered to you using auto loan calculator.

Below this average level, however, interest rates start to rise. Loans may also have more restrictive down payment requirements, maximum loan amount and term, and the choice of lenders will be more limited. Experian reported that the average used car rates for scores below 600 were nearly 13 percentage points higher than for scores above 780 and about 16 percentage points higher for scores below 500. Still, these scores didn’t mean that buyers couldn’t get a loan at all. Experian reported that during the same period, borrowers with these credit levels still accounted for about 18% of loan transactions on new and used vehicles. See more details on get auto loans with bad credit.

Getting your credit report is free

To know what to expect when shopping for a loan, you need to know your credit scores and it’s free to check them. Under federal rules, you can get a free credit report from each reporting agency every 12 months, but during the COVID-19 pandemic, Equifax, Experian, and TransUnion made a free check available once a week. This service was recently extended until April 2022, and all three scores are available at a combined site. Getting your report can also allow you to see areas to work on if you’re trying to increase your score for a better loan, as well as spot and dispute any mistakes. The Federal Office for Financial Consumer Protection has resources on credit reports, improving credit scores and detecting errors.

But it’s not all about the score

A credit score is a major factor in your loan rates and your choices, but it’s not the only criterion. Lenders consider more than your score. The typical full loan application (which you will likely end up filling out, even if you start with a shorter online form) will ask you for information such as your job or jobs, how long you held them, and your monthly income. . Also be prepared to respond if you own or rent your home and how long you’ve lived in it. Applicants with lower scores might need to provide more details, such as assets, bank accounts, and monthly expenses, including things like child support. Depending on the answers, this additional information could make you appear to be lower risk than your score alone would indicate, thus helping you get a better loan.

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Shop for a bargain

Whatever your credit rating, it’s essential to shop around for the best loan deal, not just the car. Budget for the vehicle, then shop around for loan terms. It’s a good idea to start with a credit union or bank where you have an account. Get quotes from more than one lender and try to have a pre-approved offer in your pocket before you buy the car. Then you won’t have to depend on the finance department of the dealership or the car manufacturer – unless they give you a better deal.

Related Video: Car Buying Decisions

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