What credit score is needed to buy a car?

August 15, 2019

what credit score is needed to buy a car

Buying a car is easy if you have the upfront cash, but if you are looking to finance a vehicle purchase you will need to pay close attention to your credit score. Auto lenders use your credit score to determine not only loan eligibility, but other important factors including interest rates, loan terms, and monthly payment amounts.

The recommended credit score needed to buy a car is 660 and above. This will typically guarantee interest rates under 6%. Auto lenders do accept nonprime and subprime customers, however, the interest rates are significantly higher.

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How Is Your Credit Score Calculated?

how your credit score is calculated

Your payment history has the biggest impact on your credit score. It makes up for 35% of your score, followed closely by your credit utilization. The reason these two indicators are weighted so heavily is they give the clearest picture of your ability to pay back loans on time.

Other factors that determine your credit score include the duration of your history, the number of recent inquiries and the variety of accounts you have. A lengthy credit background shows an ability to manage financial obligations for extended periods of time, while multiple inquiries at once may hurt you. If your credit is a good mix of credit cards, mortgage and auto loans, you may be in a better position than if all of your debt stems from credit cards.

What Is The Auto Insurance Score?

Your Auto Insurance Score represents your risk potential as a driver. The AIS is typically assigned by insurance companies in order to assess the likelihood of your filing a costly claim.

car graphic

Although your driving record and auto claims history are both considered in the calculation of this number, neither is surprisingly the highest priority. Insurers use your credit report as the key source to figure out your AIS. This may seem counterintuitive, but studies support the practice of correlating driving risk and credit history.

The main point that insurers are concerned with is the amount of financial liability you’ve taken on in the past. Unlike mortgage companies, they don’t care as much about your current income or job history. Taking all this information into account, your credit score can be a major predictor of your AIS.

How Does Bad Credit Impact Your Insurance Premiums?

Insurance companies use your AIS to determine your premiums. This amount is meant to offset the company’s risk if you end up filing a claim. Because the AIS is heavily related to your credit score, it stands to reason that a low score may raise your monthly premium. Some agents may even deny you coverage if they decide the risk of taking you on as a client is too great.

Not all insurance companies use an AIS as part of their underwriting procedure, but many do. To get the most-comprehensive coverage at the lowest rate, it’s wise to focus your attention on improving your credit. In addition to elevating your AIS and lowering premiums, better credit can help you pay less for your car in the long run.

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How Will Your Credit Score Affect Your Auto Loan Rates?

Rather than declining borrowers with low credit scores, auto lenders will raise the annual percentage rate to adjust for the added risk. Although you may not need to raise your credit score to get a loan, it can be worth your effort in order to lower your average auto loan rate.

Because borrowers with lower credit scores are a sign of negative borrowing practices, a lender will adjust average loan rates to cover their risk. The difference between an interest rate for a candidate with good credit versus bad credit can be significant. Those with exceptional history may secure rates of less than 3% , while those who have struggled may pay over 15%.

The good news is that you may be able to use your auto loan to improve your credit score. By keeping up with payments and repairing your credit, you can consider refinancing down the road to get a better interest rate.

Average Auto Loan Rates in 2018

Credit Score Average Loan Rate for a New Car in 2018 Average Loan Rate for a Used Car in 2018
Super Prime 781–850 3.4% 4.1%
Prime 661–780 4.4% 5.9%
Nonprime 601–660 7.5% 10.6%
Subprime 501–600 12.1% 16.7%
Deep Subprime 300–500 14.9% 19.5%

How Will Your Credit Score Affect Your Total Loan?

In the first half of 2018 customers signed loans that were on average $30,958 when purchasing a new car and $19,708 when purchasing a used car. Borrowers signed loans that had a length of term on average of 68-months for a new car, and 64-months for a used car.

Rather than shopping for an auto loan based off of the average loan rate, monthly payments, or length of term, it is best to look at total cost. The total cost of a loan is easier to compare across lenders as it only compares the total out of pocket cost you incur over the contract.

Based on the average loan amounts, length of term annual percentage rate, here is how much a credit score can affect your total loan costs.

Total cost of loan based on credit score

Credit Score Total cost of a $30,958 loan with a 68-month term Total cost of a $19,708 loan with a 64-month term
Super Prime 781–850 $34,079 $21,974
Prime 661–780 $35,034 $23,019
Nonprime 601–660 $38,096 $25,885
Subprime 501–600 $42,924 $29,898
Deep Subprime 300–500 $46,025 $31,847

How Can You Improve Your Auto Insurance Score and Your Credit Score?

Because your credit score is a combination of many factors, understanding it can be a complicated process. Despite a long list of positive contributions, you may have a lower score because of one negative item. You might even have items on your reports that are unfair or inaccurate, resulting in a significant decrease in your score.

car keys graphic

The first step to turning things around is to do an in-depth review of your reports. You can enlist the help of credit professionals to help you. They can work with creditors and reporting agencies on your behalf, so that inaccurate information can be taken off your reports. What remains are aspects of your score you can take control of: payment history, credit utilization, and new credit inquiries. There are several adjustments you can make to your financial habits that may help improve your score.

Credit Scores Used for Car Loans

Although most lenders do not set a minimum score needed for a loan, they will offer worse loan rates and terms for borrowers with lower scores. By adjusting the annual percentage rates on loans, lenders can cover the additional risk of lending to a borrower with a low score.

In 2018, Experian reported the average credit score used to secure a new car loan was 722 and 655 for securing a loan on a used car. Even when offered interest rates above 7%, borrowers with credit scores below 660 accounted for 68% of used vehicle loans and 40% of new vehicle loans.

Distribution of credit scores used for auto loans in 2018

Credit Score New Cars Used Cars
Super Prime 781–850 28% 12%
Prime 661–780 45% 36%
Nonprime 601–660 17% 22%
Subprime 501–600 10% 25%
Deep Subprime 300–500 0% 5%

What Score Do You Need to Buy A Car?

Ultimately, there is no set number you need to reach in order to be eligible for an auto loan because each lender has different requirements. Just keep in mind that the lower your score, the more you may end up paying on the loan. Insurance companies might charge you more per month, and your interest rate will likely be higher.

You’ve got the will, we have the way. Give us a call today and let us help you fix your credit

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