Minimum Credit Score for a Car Loan
Build strong credit
while you save
What is the Minimum Credit Score for a Car Loan?
The good news for those with poor credit is that no standardized minimum credit score requirement exists for obtaining a car loan. However, consumers with scores below 600 will likely encounter interest rates that are two or three times higher than applicants with good credit.
Subprime lenders provide car loans specifically for consumers with lower credit scores. Providers of bad credit auto loans often include specialty online lenders and buy-here-pay-here dealers.
J.D. Power’s latest data indicates that average new car prices now exceed $41,000. Most subprime car loans involve used vehicles that are also pricier than ever, meaning these borrowers will increasingly face large monthly payments and pay massive amounts of interest.
Average Car Loan Rates By Credit Score Range
What is a good credit score to buy a car? Those with a 660-credit score and above usually will have access to lower interest rate financing.
Auto Loan Credit Summary
| Credit Score Range | Average Interest Rate | Average APR(New Car) | Average APR(Used Car) | Avg. Monthly Car Payment (New) | Avg. Car Loan Term |
| Super Prime Borrower(781 – 850) | 3.24 % | 2.34 % | 3.66 % | $ 541 | 66.88 |
| Prime Borrower(661 -780) | 4.21 % | 3.48 % | 5.49 % | $ 574 | 73.04 |
| Non-Prime Borrower(601 – 660) | 7.41 % | 6.61 % | 10.49 % | $ 591 | 74.28 |
| Subprime Borrower(501 – 600) | 11.33 % | 11.03 % | 17.11 % | $ 579 | 73.30 |
| Deep Subprime Borrower(300 – 500) | 13.97 % | 14.59 % | 20.58 % | $562 | 72.46 |
Source: Experian Q2, 2020
As the chart indicates, those seeking to finance a vehicle have plenty of incentive to improve their credit to levels that enable them to secure low-interest rates. Although the chart does not reflect it, another major potential for subprime borrowers involves negative equity.
Subprime borrowers encounter higher prices for used vehicles today, which is exacerbated by the excessive interest rates they face. This creates a scenario where these consumers may find the monthly payments to be unaffordable.
Faced with the reality of unaffordable monthly payments, subprime borrowers may choose longer-term loans to make the payments more manageable. Here, many individuals develop negative equity, meaning they owe more to the lender than the car is worth.
Compared to a home mortgage, financing a car poses much greater risks for borrowers because cars lose value each year (depreciation).
Can you lease a car with bad credit? A lease can loosely be defined as a long-term vehicle rental with a defined term and monthly payments. No universally accepted credit score requirements exist for leases, but those with scores below 620 are unlikely to obtain approval.
How to Get a Loan with Bad Credit:
Consumers with poor credit that are seeking a car loan should review their updated credit report to ensure they have an accurate understanding of their credit profile. Fortunately, consumers are entitled to a free copy of their credit report annually from each credit bureau.
Check your credit report for any errors or inaccuracies, particularly those that might be worsening your credit score. Each credit bureau now has an easy-to-use application on their website for notifying them of potential errors that could be corrected.
Consider Putting Down a Larger Down Payment
Prospective borrowers are encouraged to consider accumulating a larger down payment for several reasons. First, lenders who identify you as a credit risk may make an offer of financing that is contingent on you putting some specified amount down.
Having a reasonable down payment might also allow you more potential lending options, some of which might offer you the lowest interest rates. Making a down payment also allows you to reduce the amount of high-interest debt that you must ultimately pay.
Consider a Cosigner
Borrowers with no credit history or a very poor credit history that are otherwise unable to qualify for financing may consider asking a friend or relative with adequate credit history to serve as a cosigner. Parents often cosign for their children during young adulthood.
A cosigner is typically someone you know fairly well that is willing to risk their own good credit by assuming financial responsibility for securing your car loan. Keep in mind that a cosigner’s role and active level of responsibility is distinct from that of a co-borrower.
A cosigner is not primarily responsible for making the loan payments each month and has no rights of use or ownership of the vehicle. With a co-borrower, a shared (equal) ownership arrangement exists between the parties, which is more common among spouses.
How to Improve Your Credit Score Before Applying for a Loan:
Lenders view credit scores as a numeric indicator of the level of risk that a borrower represents. A credit score ranges anywhere from between 300 to 850 and is based on data contained in your credit report.
The average credit score in the U.S. is roughly 710. Any number above 700 is generally considered to be a good credit score and 800 or above is deemed an excellent credit score.
Those with a low credit score should expect to pay higher interest rates that translate to larger monthly payments and more costly overall financing. A poor credit score not only hinders you with car financing; it extends to personal loans, credit cards, and possibly auto insurance.
According to Transunion, the most important factors that influence a credit score are as follows:
- Payment history: Consistently making all monthly payments is the single largest factor that influences your credit report.
- Length of credit history: Those with a good credit score generally have credit accounts that have been active for several years.
- Credit utilization rate: Your credit utilization ratio is the percentage of your overall available credit that you are using. For example, having a $100 balance on a credit card with a $1,000 limit equates to a 10% rate. Maintaining a rate below 30% is best.
- Credit mix: Lenders like to see two or more types of credit accounts such as credit cards, car loans, mortgages, etc.
- New credit accounts: Suddenly opening several credit accounts in a short time suggests risk, particularly for those with very short credit histories.
- Hard credit inquiries: When you apply for a new account, prospective lenders check your credit–often called a “hard pull.” Inquiries have a minor negative impact and remain on credit reports for two years; however, FICO only looks at those from the past 12 months.
Improve Your Credit Score
One of the most common ways of improving your credit score is obtaining a secured credit card. A secured credit card typically requires an applicant to first make a deposit that is generally close to or equal to the account’s initial maximum credit limit.
The deposit required for obtaining a secured credit card account is typically refundable after the borrower demonstrates a pattern of responsible account management. Always verify that the card issuer reports account activity to the three major credit bureaus.
Another consideration involves using a credit builder loan from CreditStrong as a way of obtaining a higher credit score that may allow you access to a more favorable vehicle loan in the future.
With a credit builder loan, the borrower can establish a positive payment history by making monthly payments that are regularly reported to the major credit bureaus.
Try to Get a Preapproved Loan
Obtaining an auto loan pre-approval involves approaching a bank, credit union, or another auto lender in advance to determine your eligibility for aspects of an auto loan such as the maximum amount you can borrow, your loan rate, and perhaps the term and monthly loan payment.
Securing a pre-approval from a third-party lender may incentivize dealerships to search their network of lenders for a loan with a lower interest rate. A pre-approval may also prevent borrowers from unknowingly paying add-on financing costs that result from dealer markups.
Pay a Higher Down Payment
Having a solid down payment reduces the amount you must borrow, which may allow you to enjoy a short-term loan, and reduce the potential of finding yourself with negative equity on the vehicle.
Which Credit Score Do Lenders Use for Car Loans?
The most widely used credit scoring models today include FICO 8 and 9 as well as VantageScore 3.0 and 4.0. Providers of auto financing use different models, making it potentially difficult to determine without specifically inquiring.
FICO does offer industry-specific scores that place greater emphasis on a consumer’s past credit accounts including auto loans, credit cards, and mortgages as the following table indicates.
Summary of Widely Used Industry-Specific FICO Versions
| Experian | Equifax | Transunion | |
| Auto Lending | FICO Auto Score 2, 8, 9 | FICO Auto Score 5, 8, 9 | FICO Auto Score 4, 8, 9 |
| Credit Cards | FICO Bankcard 2, 8, 9 | FICO Bankcard 5, 8, 9 | FICO Bankcard 4, 8, 9 |
| Mortgage Lending | FICO Score 2 | FICO Score 5 | FICO Score 4 |
Source: FICO score versions
Here, we see how each bureau uses a different model. Keep in mind that not all lenders will necessarily report all loan activity to all three bureaus.
Auto loans represent another example of why smart consumers prioritize establishing credit and building a history of responsible financial behavior.
CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.
