Buying a car is usually a costly affair. According to Statista, 81.24% of new vehicles and 34.53% of used cars in the United States are purchased through financing. But the question remains, what credit score is needed to buy a car? It is usually challenging to determine what is a good credit score to buy a car. There are various credit scores, with each financier offering its requirements. Fortunately, even if you are not able to qualify by yourself, you can opt for an auto loan. If you have a co-signer with excellent credit.
What Credit Score Is Needed to Buy a Car?
There is no official credit score required to buy a car. It is common for individual lenders to set their requirements. This means there will be different cutoff points for different financiers. When reviewing your auto loan, the lender will check your credit score. They will also check your income to divide clients into different groups based on their scores, such as:
- Deep subprime: 300 to 500 (14.59% interest)
- Subprime: 501 to 600 (11.03% interest)
- Nonprime: 601 to 660 (6.61% interest)
- Prime: 661 to 780 (3.48% interest)
- Super prime: 781 to 850 (2.34% interest)
So, what credit score is needed to buy a car? In general, the financier often prefers clients in the prime and super-prime regions, which is a score of 661 or higher. This represents around 65% of individuals looking for financing, while only 18% of all borrowers are in the subprime and deep subprime categories.
Credit Scores That Auto Lenders Use
The majority of lenders (90%) prefer to use the Fair, Isaac, and Company (FICO) credit score model known as the FICO Auto Score that determines how risky a client is as a borrower. The FICO Auto Score model is different from other FICO scores and is specifically designed for auto lenders. Apart from Auto Score, FICO has multiple versions, with a FICO score of 10 being the newest release.
To determine the FICO Auto Score, FICO will start by calculating your traditional credit scores that range from 300 to 850, then adjust the calculation based on industry-specific risk behavior to create tailored auto scores. While the company does not share its scoring formula, it outlines several factors that have a direct impact on your scores:
- Payment history (35% of total score)
- Amount of debt compared to credit limits (30%)
- Age of credit (15%)
- A recent application for credit (10%)
- Whether you have more than one type of credit (10%)
New Competitor On The Block
VantageScore is the newest competitor to FICO. It is a consumer credit scoring system created in 2006 by the top three credit bureaus, Experian, Equifax, and TransUnion as a direct competitor to the FICO score model. The model can generate scores ranging between 300 and 850 using machine learning technology to create a more accurate score.
VantageScore claims that its algorithm and technologies give it an accuracy edge over the FICO score because it ignores numerous possible factors such as marital status, race, employment history, religion, occupation, color, gender, age, where you live, total assets, among others. An individual with a VantageScore of 600 or less is considered very poor credit, while a score ranging between 601 and 660 is deemed fair. A score of 661 to 780 is regarded as a good score, while anything beyond that is excellent. VantageScore weighs its components based on (arranged from extremely influential to less influential):
- Total credit usage, available credit, and balance
- Credit mix and experience
- Payment history
- New accounts opened
- Age of credit history
How Does Your Credit Score Impact Your Loan Costs?
Credit score plays a huge role when it comes to loan costs. They reflect your past credit usage, information that lenders use when measuring how responsible you are with debt. Having a high score means you are more likely to have lower interest rates. Interest rates are even higher for used car loans. Reaching 17.11% for the subprime category and 20.58% for the deep subprime category.
The difference between deep subprime and a super-prime average APR for both used and new cars might not seem that huge at first, but things can become complicated over the lifetime of the loan. For example, the average APR for an individual at super-prime looking for a used car is 3.66%, while that of deep subprime is 20.58%.
Suppose the individual purchases the vehicle for $25,000, with a $5,000 down payment, and pays for over five years, the total interest paid by the time the car is paid off will be $1,916. However, with a poor credit score, you might end up paying $12,181 in interest alone, which is more than half the amount you paid for the vehicle.
If you have a poor credit score, don’t worry, you are not alone, as approximately 16% of Americans are experiencing the same problem, and only 1.2% of Americans have a perfect credit score. Fortunately, you can improve your credit score if you fear it will affect your auto loan.
Here are some suggestions you can follow.
- Pay down credit card balances which lower your utilization rate
- Consolidate credit card debt by transferring credit card debt to a personal debt consolidation loan
- Keep your credit cards open to reduce the utilization rate and maintain your available score
- Continue paying bills on time because even a single late payment could hurt the score
- Hold off on applying for other loans because additional debt will negatively affect your score
- Review your credit reports for errors that could hurt your score, and if you find one, you can file a dispute with the credit bureau.
While you might have a good score, lenders often look at different aspects of your finances before making their final decision. Additionally, there is no industry standard for what is a good score for buying a car because every lender has its requirements. However, a score ranging from 661 to 850 is considered suitable for auto financing in most cases. Even with a poor score, there are ways you can still get funding for your car loan.
Get a Quality Car at an Unbeatable Price
AutoSwiftly helps potential car owners get the right car for them and the necessary financing. We have years of experience negotiating deals that save you time and money, especially when purchasing a used vehicle. We have a strict no-secret policy which means if you ask us any question you will get an honest answer. Contact us today to learn more about car loans.
Recommended reading: How to Finance a Car Through a Bank or Dealership – Choosing the Best Option