What credit score do you need to buy a car? It’s a common question for anyone hoping to purchase a vehicle. Your credit score may not impact your chances of buying a car as much as you might think, but it will certainly affect the terms of your loan!
Here’s what you need to know before making a trip to the dealership.
What’s the Bare Minimum Score Needed?
There’s no minimum credit score required to buy a car. So the answer to “What credit score do you need to buy a car?” is simply “It depends.” Past rules of thumb suggested a range of acceptable credit scores, from 600 to 660 to 720.
Many auto lenders make options available to those with both good (prime) and bad (subprime) credit scores. They may offer loans without a credit check at all.
However, a good credit report will make it easier and cheaper to buy a car. While auto lenders are more flexible these days, they’re still careful about taking on excessive risk. A buyer with a low credit will pay higher car loan rates.
How Auto Lenders Check Credit Scores
When you apply for a car loan, the lender submits your personal information to at least one of the three major credit bureaus: Equifax, Experian, and TransUnion. These agencies review your credit history and submit a report to the lender.
This report reflects all aspects of your credit history. It includes your record of making monthly payments on time on credit cards and other accounts, if any. The report will also outline the causes of your negative credit history, like late payments, foreclosures, collections activity, bankruptcy, and more.
The summary of all this information is your FICO® credit score. This number is typically between 300 and 850. In 2022, the average FICO® score in the U.S. was 716. While different lenders have different criteria for their decisions, your number is a guide for setting loan terms and interest charges.
The range of scores is broken down into different brackets or tiers. So, what credit score do you need to buy a car?
Auto Loan Credit Score Brackets
Your credit score will fall under one of the five categories below. Each classification corresponds to a defined annual percentage rate on interest. These “brackets” are defined loosely as follows.
781 to 850: Super Prime
Car buyers in the top tier of credit scores present the least risk to auto lenders, and they get the best deals on interest rates. As of August 2023, the average annual percentage rate for a super prime buyer is 5.18%.
661 to 780: Prime
Prime credit scores rank just below super prime. Borrowers in the prime bracket are still likely to get favorable interest rates: as of August 2023, the average is 6.40%.
601 to 660: Near-Prime
Those with fair credit scores may have made the occasional late payment. They might have also gotten more credit inquiries on their behalf or a thinner mix of credit sources. The average annual percentage rate for near-prime borrowers stands at 8.86%. That’s not bad, but it’s a significantly higher cost over the life of the loan.
501 to 600: Subprime
This bracket of credit scores is the first “not good” level. Although subprime borrowers can probably find an auto lender willing to work with them, the interest rates jump dramatically. As of August 2023, that rate is 11.53%.
300 to 500: Deep Subprime
The lowest level of credit score includes borrowers who have had several negative credit events. They may have experienced multiple collection efforts, repossessions, charge-offs, or bankruptcy. The current average interest rate for these higher credit risks is 14.08%.
It’s still possible for those with subprime and deep subprime credit scores to take out a loan. But along with high-interest rates, they might also face tougher terms and limitations from auto lenders.
How Subprime and Deep Subprime Scores Affect Car Loan Terms
If you have a subprime or deep subprime credit score, you will face more rejections from auto lenders. If you are approved, you’ll face more expensive, restrictive, or limited loan terms.
- Higher Interest Rates – As discussed above, borrowers with subprime and deep subprime credit scores will pay higher interest rates than those with better scores.
- Bigger Down Payments – An auto lender may be happy to issue a loan to a subprime borrower who makes a markedly larger down payment on their car. This may make the lender feel more secure about the borrower’s ability to make future payments.
- Shorter Loan Terms – A lender might set a shorter period for the borrower to repay the loan. This makes the borrower’s monthly payments much higher. but it helps the lender limit their risk exposure.
- Higher Costs – In addition to higher interest rates, a subprime borrower may face higher origination and administrative fees to offset the costs of the loan.
- Prepayment Penalties – The lender may assess penalties on a subprime borrower if they manage to pay off their loan ahead of schedule. While these fees should be included in the loan agreement, they may still take borrowers by surprise. Many borrowers do not read their loan agreements thoroughly.
- Credit Insurance – Lenders might ask or require a subprime borrower to take out credit insurance as a protection against loan default.
- Repossession Tools – Borrowers with low credit scores may be required to place GPS trackers and starter interrupt devices on their vehicles. This enables the lender to disable the vehicle and locate it easily if they want to repossess it.
The “Buy Here Pay Here” Option
When considering what credit score do you need to buy a car, people with subprime or deep subprime credit ratings have viable options, such as the “buy here pay here” loan. This type of loan doesn’t come from a traditional lender. Instead, the loan is executed and administered by the dealership where the car is purchased.
In a “buy here pay here” loan agreement, the dealership offers to finance the loan in-house. It may even skip the credit check or offer favorable terms over a short time.
The auto dealer evaluates the maximum amount it will loan the new car buyer. This valuation takes the buyer’s income into consideration, as well as other factors like the debt-to-income ratio.
The dealer then finds the cars in its inventory that will cost less than the loan amount. After the borrower buys the car, they remit their monthly payments directly to the dealership.
The clearest advantage of taking out a “buy here pay here” loan is the easy qualification. The dealership usually doesn’t make a credit check. The loan is designed for a borrower with a suboptimal credit history.
A “buy here pay here” loan is also extremely convenient. Dealers usually make quick approval decisions, often on the spot. There may be a low down payment or even no down payment. Paperwork for a “buy here pay here” loan is frequently kept to a minimum.
There’s considerable risk involved in a “buy here pay here” loan. If the dealership is willing to take it on, it has to find ways to mitigate that risk. That means passing extra costs down to the customer.
For example, the dealer may price the car much higher than its market value. It will likely set vastly higher interest rates. Right now, the average rate for a “buy here pay here” loan is around 20%. The terms of such a loan are often inflexible.
The borrower’s credit status might also take some cruel hits. Since the dealer usually does not report to any of the credit bureaus, the loan won’t influence your credit score. Even if you make regular payments and eventually pay off the car, your score won’t improve. (Although some dealers will report missed payments to the bureaus, which could hurt your score.) You also can’t use a “buy here pay here” loan to diversify your credit portfolio.
It doesn’t stop there. Repossession terms for a “buy here pay here” loan are the strictest in the auto business. The repo’s timeline is usually extremely short, and even one late payment could trigger repossession.
The borrower may be forced to take out credit insurance. If they acquire the car with no down payment, they’re already in “negative equity,” where they owe much more than the car’s market value. This immediately puts the loan underwater, and the dealer may demand that the borrower take out gap insurance.
Other Financial Options for Subprime and Deep Subprime Borrowers
The “buy here pay here” loan option is loaded with risks to the borrower. But subprime customers still need cars. What other options do you have for taking out a loan with an imperfect credit history?
1. Improve Your Credit Score
You may think this is “easier said than done.” But with patience, you can take small, mindful steps to improve your credit score. The self-evident ways to do this include making on-time payments, limiting credit card use, and monitoring your credit reports.
You can pay down pre-existing debts to chip away at your credit utilization ratio. Eventually, you may be able to diversify your credit sources, which improves your credit score.
2. Find a Credit Union
You may face different requirements if you want to join a credit union. But if you meet the criteria, it may be a great option for financing an auto loan.
Credit unions are nonprofit businesses. This makes them more attentive and flexible to their customer bases. In turn, a credit union may be far more willing to set favorable terms for a car loan, even with suboptimal credit.
3. Get a Co-Signer
A common solution for teenage first-time car buyers with no credit history is to have their parents co-sign on their loans. That option is also available to independent adults with bad credit.
Finding a co-signer for your new car will make loan approval easier. But you’ll have to keep in mind that if you make late payments or default, that co-signer will be responsible for paying off the loan. That could be tricky at best and relationship-ending at worst.
4. Make at Least a 20% Down Payment
If you are asking yourself, “what credit score do you need to buy a car?” and know your credit history isn’t flawless, making a down payment of 20% on the new car purchase can be one of the best options you have. A down payment of at least 20% might be enough for a reluctant lender to change their mind.
5. Save Up Cash
Of course, the easiest way to avoid the hassle of a car loan is not to get one. If you have the means and the time, consider building your cash reserves until you can afford a new or used car with no payments, no interest rate, and no threat of repossession.
Good Credit, Bad Credit, No Credit — There Are Options for All
What credit score do you need to buy a car? The answer varies from lender to lender, but no matter how depressing your credit history is, there’s an option for getting a car loan somewhere. Maintaining and improving your credit score is important, but even with bad credit, you can find an auto loan.
If you have to buy a car with bad credit, you will probably be facing a high interest rate. Your best move in that case is to buy a used car, spend as little as possible, and work on improving your credit so that you can refinance with a cheaper loan or even upgrade your vehicle.