The hurdles faced by car shoppers with 'Fair' credit can seem anything but fair. Your credit score isn't classified as 'Bad' or 'Poor', so why are you struggling to get approved for an auto loan with a reasonable interest rate? The reality is that a Fair credit score is still considered subprime by most lenders, and securing the right auto loan will take a unique approach. See what Fair credit means for you as a car shopper, learn how to buy a vehicle with Fair credit, and get some tips on improving your score to slide into the Good credit category.
What Does "Fair" Credit Mean?
Auto lenders use credit ratings as a measuring tool to determine how likely a car buyer is to default on loan payments. The two main credit score rating systems used by lenders include FICO and VantageScore. These models break down consumer credit histories into 5 categories. For example, FICO uses "Very Poor, Fair, Good, Very Good, and Exceptional." According to Experian, FICO labels "Fair" credit as a score between 580-669, while VantageScore's Fair credit range is 650-699.
Unfortunately, a Fair credit score can disqualify auto loan applicants from getting approved by traditional lenders. Even though it's one category above "Very Poor" (or deep subprime) it is still seen as a risk to lenders. While a "Very Poor" credit score is usually the result of major events like bankruptcy or repossession, a Fair credit score may be caused by late or missed payments, high credit utilization, or lack of credit history.
If the auto loan application is accepted, car shoppers with Fair credit will likely pay interest rates well above the average. Car buyers with a credit score between 590-619 pay an average of 14% interest on 60-month new car loans, while shoppers with Very Good credit (720-850) pay just 3.6% on average, according to Value Penguin.
How to Get a Car Loan with Fair Credit
Since Fair credit is still considered subprime, shoppers that fall into this category should approach the auto finance process strategically. Many of the tips for buying a car with bad credit will apply if you have Fair credit. It's a good idea to think outside the box of traditional lenders. Shoppers with Fair credit usually find more success going with alternative lenders such as credit unions or lenders who specialize in helping car buyers with subprime credit. The following tactics will also improve the odds of finding the best car loan:
- Get Pre-Approved: Auto loan pre-approval allows car shoppers to compare multiple offers and interest rates which can result in substantial savings over the loan term. Apply for pre-approval from alternative lenders like credit unions and online subprime lenders.
- Prepare a Down Payment: A down payment of at least 20% on a new car and 10% for a used car will show a lender that you're in a position to make your payments.
- Bring a Cosigner: A cosigner with Good credit will give auto lenders confidence to approve your application because this person becomes a backup if you can't make your payments. Having a cosigner can help you secure a lower interest rate as well.
Improving your Credit Score
If your car purchase can wait, it pays to work on improving your credit score before pulling the trigger. This is especially true if your score is inching up on the "Good" credit category. In order to improve your score, it's important to first understand how credit scores are calculated. The factors taken into account by FICO include payment history (paying bills on time consistently), credit utilization (how much credit you use vs. your total borrowing limit), length of credit history, credit mix, and recent credit applications.
Improving your credit score to get out of the subprime range will eliminate auto loan approval headaches as well as offer lower interest rates. The name of the game to improving your credit is consistency. Since payment history accounts for the largest chunk (35%) of your credit score, creating a habit of making payments on-time will significantly improve your score. Reducing your credit utilization to under 30% (and under 10% for the best scores) will also help you get closer to that coveted "Good" credit rating and a low-interest car loan.