If your rocky credit history has kept you from getting the car loan you need, you may be wondering how much you need to boost your score before you can get that long-awaited auto loan approval notification. There's no official "minimum credit score" for car loan approval, but it's important to understand the credit categories and the impact they have on your loan status and interest rates. Learn which credit category your score falls into, how it affects your car loan, and how to increase your chances of getting approved even if your score falls below the "good" range.
Credit Score Categories
There are 3 major bureaus that keep tabs on everyone's credit history in the US. These 'big three' are Experian, Equifax, and TransUnion, and each one maintains its own credit score rating system. You've probably seen 'FICO' used more often than other score types and there's a reason. The credit score rating system was created by the Fair Isaac Corporation (FICO) and it is still the most widely used score among lenders.
The range for FICO scores is between 300-850 and it is broken up by categories including very poor, fair, good, very good, and exceptional. According to Experian, a credit score of 670 and above is considered "good". That doesn't mean that borrowers with a lower score are out of luck when it comes time to apply for a car loan, but they will encounter more obstacles.
About 16% of the U.S. population has a "poor" score between 300-579 which puts them at risk of not getting approved for a car loan at all. 17% of the population has a "fair" score between 580 and 669 which is considered subprime and will result in higher interest rates. 21% fall into the "good" range with a score between 670-739, 25% fall into the "very good" range from 740-799, and 21% are in the "exceptional" category between 800 and 850. For the best chance of being approved for a car loan, you'll want your score to be in the "fair" range or higher, and for lower interest rates, shoot for at least a 670 which gets you into the "good" range.
How Will My Credit Score Impact My Car Loan?
Your credit score will affect your car loan application in two ways, your ability to get approved and your interest rates. Car shoppers with good or excellent credit and a steady income can usually walk into any dealership or bank and get approved for a car loan. Shoppers with fair or poor credit will have a harder time finding lenders willing to issue an auto loan. Although it is more difficult to find lenders that work with subprime borrowers, there are options out there. In 2018, 38.3% of loans issued in the third quarter of the year were to borrowers with credit scores of 660 or lower. The average credit score for a new auto loan was 717, while the average score for used car loans was 661.
Even if you're able to get approved with your current credit score, having bad credit can negatively impact your interest rates because lenders consider borrowers with bad credit to be high risk. According to Experian, for borrowers with scores of 660 or less, average loan interest rates in Q3 of 2018 ranged from 7.52% to 14.41% for new vehicles and 10.34% to 18.98% for used. Comparing these rates to those for borrowers with prime credit really puts it into perspective.
An auto finance report from Wallethub compared the total interest paid by borrowers with excellent credit to those with fair credit on a $20,000, five-year loan with a fixed interest rate. A borrower with a fair credit score of 620-659 paid an average of $8,115 in interest over the course of 5 years while a borrower with excellent credit of 720 or above only paid $1,916 in the same timeframe.
Tips for Getting a Car Loan with Bad Credit
In a perfect world, you'd have plenty of time to improve your credit score before applying for a car loan to ensure approval for the best possible interest rate. The reality is there are times you can't put off a car purchase, especially if you need reliable transportation for work or family obligations. In this case, there are several steps you can take to increase your odds of getting the car loan you need, even with compromised credit.
Car shoppers with compromised credit should seek out alternative lenders including credit unions, online lenders and buy-here-pay-here dealerships. Researching these alternatives can mean the difference between loan approval and rejection, and a reasonable interest rate or one that's outrageously high. Getting pre-approved for a car loan allows you to compare interest rates from multiple lenders giving you the power to shop around and move forward with the best option.
Another way to increase your odds of car loan approval and a fair interest rate is to have a down payment ready for the vehicle you're buying. The recommended down payment for a new car is 20% of the vehicle's price and 10% for a used car, but some money down is better than none. A down payment shows the lender that you can be responsible with your financial obligations even if your credit history is less than exceptional.
