What Is the Minimum Credit Score Needed to Get a Car Loan?
Have you ever wondered what credit score you would need to get a car loan? Most people do. Most people do not have the amount just lying around to go and buy a car directly. A 2019 statistic shows that over 113 million Americans have car loans. This number is steadily rising with time. Having a higher credit score will definitely land you with some benefits, but you can even get your wish granted with a smaller credit score.
You also might be someone who wants an auto loan but you are not sure about the score and the interest rates you would have to pay. Keep reading on in order to find out what you need in order to bag that shiny new Volvo XC60, BMW X5, or the Mercedes-Benz GLC 600.
What is a credit score and what do the values mean?
A credit score is a measure of a person’s creditworthiness. In easier terms, it is a figure that represents a person’s ability to pay their debts off in time. If a person is punctual and pays all their debts and all the loans on time, then they are said to have a good credit score. The opposite is also true and leads to a bad credit score.
It is measured on various factors, such as the person’s repayment history, credit files across loans, and credit institutions. The number ranges from 300 to 850. The higher the better, and the more benefits you will be presented with. It basically lets a lender know that you will repay your debt on time.
Here are some of the scores and what they mean:
Deep subprime: 300-500 (considered poor)
Subprime: 501-600 (considered fair)
Nonprime: 601-660 (considered good)
Prime: 661-780 (considered very good)
Superprime: 781-850 (considered excellent)
How much credit score do you need to get a car loan?
Well, if you want a car, you must have a pretty solid credit score. Credit scores usually also reflect the amount of interest you would have to pay. The higher your credit score, the lesser interest.
You must have a credit score of at least 660 and above to get a car loan with an interest rate of about 6%. This also varies based on the purchase of a used car or a new car. A used car loan will require an average credit score of 657, while a new car loan would be above 721.
However, if you have a credit score less than that, don’t worry. A statistic showed that around 30% of car loans were taken by people with a credit score less than 600. Also, 4.5% of those people had a credit score less than 500. It’s just that you would have to pay more interest.
Credit score and how it relates to car loan rates
You will want to get your credit score checked before you go to purchase a car, as it would cause a difference in the loan rates. Some lenders can also present you with auto-specific credit scores that would only show the credit score related to car loans.
As you have more credit score, the amount of interest you would have to pay is also drastically reduced. For example, if you buy a used car and your credit score is above 700, you would find rates of around 6.05%; but someone with a lower score of 500 would have to pay 17.78%.
On a five-year loan for the principal of $20,000; the monthly interest would be $387 for the one with a better credit score and $505 for the one with a low credit score. Here is a chart to help visualize it better:
|Credit Score||Average APR for new cars (in percentage)||Average APR for used cars (in percentage)|
|Deep subprime: 300-500||14.66||21.07|
As your credit score gets lower, you would have to dish out a lot of extra money over time for your car loan. If you have a credit score below 700, you would be asked questions about why that is the case. You must be prepared to answer. Don’t expect to get friendly faces if you have a number too low.
What can you do if you have a low score?
If you have a low credit score, don’t be disheartened. You could still be able to get a car loan. If you are someone who has debt elsewhere and hence, a low credit score; but you somehow managed to pay all your car debts on time, you might be considered for a decent loan.
You must also have a stable job, house and must also be prepared to pay a decent enough down payment. When you go to get the loan, you would obviously be asked for legitimate documents, such as proof of residence, bills, and full-coverage auto insurance. You must also have documents that state that you have been paying your bills on time recently, even with a lower credit score.
You must pay your bills on time. All of your bills must be paid on time to avoid any negatives in your credit score. You must also keep your credit card balance low compared to your credit limits. It can have a positive impact on your credit score. Also, once you get a new loan, do not try to get another loan immediately afterward.
Finally, you must also keep your credit card accounts open. If you didn’t know already, you can also refinance the loan after six to 12 months. So, if you garner a better score during this period, you can be eligible for lower interest rates.
Can you build a credit sWhat Is the Minimum Credit Score Needed to Get a Car Loan?core by paying car loans?
Yes, you can. Paying any loan on time helps you build your credit score. Paying a car loan on time will help you build your payment history and your credit mix.
As the name suggests, payment history is the past record of you paying your bills on time. It plays an important role in determining your overall credit score. Credit mix, on the other hand, denotes if you have both installment loans and revolving credit. If you have only credit cards, then paying a car loan on time will certainly help you out with your overall credit score.