What Credit Score Do You Need to Buy a Car?

Buying a car involves a significant investment, and financing the purchase with an auto loan is the best option for many people. However, you’ll need a good credit history before you can get one.

According to Statista, the average credit score of Americans (on the FICO scale) has sharply increased for the first time since 2020, reaching 718 points (spring 2023). This indicates that the overall creditworthiness of consumers in the USA is improving, making it easier to obtain auto loans.

While this is a positive trend, a good credit score is still essential to getting the most favorable terms for auto financing.

Scroll down if you want to find answers to the following questions:

• What is a credit score?
• What credit score is needed to buy a car?
• What is a good credit score for a car loan?
• How does it affect your interest rate?

Credit Score: From Simple to Complex

A credit score is a numerical representation of a person’s creditworthiness. Essentially, lenders use a three-digit score to assess the potential risks associated with non-payment. It’s calculated based on information from a credit report, which is a detailed record of loan history. Key factors influencing your score include:

1. Payment history (constituting about 35% of your score) tracks the timeliness of your credit card, loan, and outstanding debt payments.
2. Credit utilization ratio (30%) reflects how much of your available credit you’re currently using. This ratio helps lenders assess how effectively you manage your existing credit lines.
3. Length of credit history (15%) demonstrates how consistently you’ve managed credit over time. A longer history provides a more dependable gauge for lenders and, as a result, can work in your favor.
4. Credit mix (10%) positively impacts your score, as a lender understands that you can handle various types of credit (installment loans, revolving credit, auto loans, etc.).
5. New inquiries (10%) are a negative indicator. A high number of credit line applications suggests an overly aggressive approach to obtaining credit.

The most well-known and recognized company providing credit scores for consumers in the USA is FICO.

The higher the score, the more likely you are to be granted credit and repay it on time.

The Importance of a Credit Score for a Car Loan

What credit score is needed to buy a car? Certainly, it acts like a report card, determining the terms of the loan. For instance, a borrower with an exceptional score may qualify for a longer loan term, resulting in smaller monthly payments.

However, where the score truly shines is in determining the interest rate. A higher rating leads to a lower interest rate on an auto loan, which in turn affects the total amount you pay over the course of the loan. For example, someone with an Exceptional score applies for a new auto loan with an interest rate of around 5.64%, while someone with a Poor level is looking at 9.73%.

Let’s consider a specific example of how the score impacts loan terms. Suppose Oscar and Charles want to take out a 5.5-year loan to pay for a Porsche 911 Carrera (price: $115,000).

So, Charles will overpay for the car by $14,949.66 more than Oscar. The reason is simple: Charles has a higher rating.

While this isn’t an absolute barrier, a low rating complicates getting approval for an auto loan overall. Lenders more often approve loans for borrowers who have a history of responsible credit use, indicated by a good credit score for a car loan.

What Credit Score Do You Need to Finance a Car?

During the review of your application for an auto loan, the lender carefully examines two key parameters:

• Income — indicates your ability to make monthly payments on the loan;
• Credit score — reflects your history of meeting financial obligations.

Based on these, lenders unofficially categorize borrowers into conditional categories.

So, what credit score do you need to buy a car? There’s no official minimum threshold for an auto loan; however, most lenders expect borrowers to have a minimum score that is approved for a standard loan. This is because lenders consider such borrowers more reliable. Typically, a good credit score to buy a car is a score of 661 or higher.

But even this figure isn’t set in stone. The change in the threshold score largely depends on two parameters. The first is the specific lender. For example:

• The financial institution myAutoloan accepts scores of 575 (Very Poor level on the FICO scale);
• Refinancing lender Gravity Lending requires a minimum of 600 points (Poor level on the FICO scale bordering on Fair).

Therefore, comparing offers from multiple lenders before securing an auto loan is crucial to finding the best interest rate and terms.

The second parameter is the type of auto loan you plan to purchase, whether it’s new or used. Vehicles with higher mileage tend to carry higher interest rates on loans, as lenders view them as less risky investments. Even cars that are just a month old may have higher interest rates than brand-new ones due to their previous use.

According to Experian’s report on the financial market for the fourth quarter of 2023, people with super-premium scores (781–850) pay an average of 2.02% less APR for a new car than people with deep substandard scores (300–500).

Final Thought

While many Americans, regardless of income level, aspire to own a car, it’s important to understand the nuances of auto loan processing. Your credit history and score are pivotal in determining the terms of a loan, particularly the interest rate and the total payment amount. Having a good score certainly makes it easier to obtain an auto loan with favorable terms, but it doesn’t mean you can’t buy a car if your rating is low.

To increase your chances of success:

• Consider making a significant down payment;
• Secure the support of a co-signer with a good credit history;
• Definitely compare offers from different lenders.