What Credit Score Do I Need for a Car Loan?

You can get a car loan with an extremely low credit score, but that doesn’t mean it’s a smart financial move.Image source: Getty Images.

It’s common knowledge that a better credit score can increase your chances of approval for loans and credit cards and can also get you better interest rates and other terms. With some types of loans, like mortgages and credit cards, you simply cannot get approved if your credit score is below a certain amount. Auto loans are a different story. There isn’t a set FICO® Score floor for auto lending, and a good percentage of auto loans made in the U.S. are to borrowers with ultra-low scores.

With that in mind, here’s a rundown of how to check and interpret your own credit score, what it means to you as a potential auto loan borrower, and a few money-saving tips that you should use in the auto-buying process, regardless of your credit score.

What is a good credit score?

FICO credit scores are the industry standard and are used by more than 90% of lenders when making decisions.

The FICO® Score is computed based on factors including the borrower’s payment history, amounts owed on loans and credit accounts, the length of their credit history, and more. It is expressed on a scale ranging from 300 to 850, with higher scores being better.

While there is no formal threshold that defines a “good,” “bad,” or “excellent” credit score, the Fair Isaac Corporation, which produces the FICO® Score, offers the following guidelines:

Data source: myFICO.

What is your credit score?

One smart thing to do before you begin the car loan process is to check your own credit score. Be sure you’re looking at a FICO® Score, as that’s what the lender(s) you apply to are most likely to use.

Many credit card issuers give customers a free FICO® Score as a perk of membership, but it can be a smart idea to pay for a score-monitoring service. I use myFICO.com, as it’s run by the creators of the FICO® Score. Not only does this get you access to FICO® Scores from all three major credit bureaus, but there are many other useful tools as well (like auto-specific FICO scoring models that auto lenders are likely to use).

You can get a car loan with a low credit score

To be clear, you can get a car loan with a low credit score. Although the subprime mortgage market has virtually disappeared since the financial crisis about a decade ago, the subprime auto loan market has exploded in recent years. Roughly 1 of every 4 car loans made in the U.S. is made to a subprime or deep-subprime borrower.

While the exact definitions of these terms vary depending on who you ask, the Consumer Financial Protection Bureau, or CFPB, defines subprime as borrowers with credit scores of below 620 and deep subprime as borrowers with scores below 580.

But you’ll pay for it

Just because you can get an auto loan with a low credit score doesn’t mean that it’s always a good financial move to do so.

For starters, lenders tend to offer significantly higher interest rates to subprime and deep-subprime borrowers. This can make a car far more expensive than its sticker price might lead you to believe. Here’s a look at the national average auto loan APRs as of Dec. 11, 2018:

Data source: myFICO.

Here’s what this means to you. Let’s say that you want to buy a new car, and that you want to obtain a $30,000 loan to do it. If you have a FICO® Score of 720 or higher, you can expect a $560 monthly payment, which would translate to a total of $3,574 in interest over a 60-month car loan. On the other hand, if you have a 675 FICO® Score, which is still generally considered to be “good” credit, your payment would be $50 higher and your total interest would be $6,611, which is more than $3,000 higher than a top-tier borrower. And finally, if your FICO® Score is 600, you’d pay $728 per month, or $13,673 in total interest for the exact same car.

In this case, the difference between fair and good credit scores could literally mean more than $10,000 in additional interest.

The bottom line is that if your credit isn’t at least in the “good” range, you may want to spend some time working on improving your credit before you go shopping for your next car. If you notice, the top tier for auto loan APRs is quite broad -- extending all the way from perfect credit down well into the good credit range. So ideally, a 720 FICO® Score or better will get you the best rate, but even moving up a tier or two can make a big difference if you have a low FICO® Score.

Beware these car loan mistakes

Regardless of whether you have excellent credit, terrible credit, or you’re somewhere in between, there are a few potentially-costly mistakes that are important to avoid.

1. Long-term loans. While the industry standard used to be 48- and 60-month loan options, 72-month and longer terms are now common. I’ve even seen 96-month (eight-year) loan terms. Auto dealers use these long terms to lower monthly payments and allow buyers to qualify for more expensive vehicles. The big problem with this is that stretching a loan out can dramatically increase your interest cost. For example, a $30,000 car loan at 8% interest for 60 months will cost you $6,498 in total interest. A $30,000 loan for 84 months with the same interest rate would cost $9,277.
2. The “monthly payment trap”. Car salespeople like to ask you how much you’re looking to spend per month. Under no circumstances should you answer this question. This effectively gives permission to charge you as much as they want in interest (and for the car itself), as long as the monthly payment is within your limit. The price of the vehicle, price of your trade-in, and the interest rate on your loan should be three separate negotiations.
3. Rolling your existing car loan into your new one. You may see advertisements that say something like “we’ll pay off your trade, no matter how much you owe.” Well, if the value of your trade is less than the amount you owe, many finance companies will add the difference to your new car loan. This is how people end up with a $35,000 loan for a $30,000 car -- avoid this type of situation at all costs.
4. Overpriced add-ons. Salespeople, especially in the finance department, love to try and upsell you on these. When I bought my 2013 Chevy Camaro, the dealership’s finance manager offered to sell me an upholstery treatment for $12 per month added to my loan’s payment -- that’s a total of $720 on a 60-month loan. I said no, only to learn that it had already been installed in the car, and they were going to give it to me whether I paid for it or not. Needless to say, I’ll never do business with that dealership again.

Shopping around for a car loan can help

Perhaps the most important suggestion I can give you, especially if you have so-so credit, is to shop around for your next car loan. You may be surprised at the dramatic difference in offers you get.

Many people make the mistake of accepting the first loan offer they get (usually from the dealership). It’s also a smart idea to get a pre-approval from your bank as well as from a couple of other lenders. Online lenders and credit unions tend to be excellent sources for low-cost loan options. Not only are you likely to find the cheapest rate this way, but you’ll then have a pre-approval letter to take to the dealership with you.

The best part is that applying for a few auto loans won’t hurt your credit. The FICO credit scoring formula specifically allows for rate shopping. All inquiries for an auto loan (or mortgage or student loan) that occur within a 45-day period are treated as a single inquiry for scoring purposes. In other words, whether you apply for one car loan or 10, it will have the exact same impact on your credit score.

Buy a car now or work on your credit?

The bottom line is that there is no set minimum FICO® Score to get a car loan. There’s actually a good chance that you can get approved for an auto loan no matter how bad your credit is.

Having said that, subprime and deep-subprime auto loans can be extremely expensive, so just because you can get a car loan with bad credit doesn’t necessarily mean you should. The savings from a moderate score increase can be substantial, so it could be a smarter idea to wait for a bit and work on rebuilding your credit before buying your next car.

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