Could your credit score put the brakes on your plans to purchase a new car? Nearly everyone will need to purchase a new car at one point or another. However, we often don’t consider how our day-to-day financial activities could be impacting our ability to purchase a car when we need one. Just how much does your credit score come into play when it comes to getting a car loan? The good news is that even someone with a low credit score is likely to be approved for auto financing. The bad news is that a low score could mean you’ll end up paying more. Check out the essential things to know about the relationship between your credit score and your new set of wheels.
Do You Need a Good Credit Score to Buy a Car?
Having a good credit score will definitely make it easier to obtain financing for your new car. However, car dealerships work really hard to offer financing options to nearly everyone. You will probably be able to get a car loan as long as you have a regular paycheck coming in. Close to 20 percent of all car loans are given to borrowers who have credit scores below 600. The average credit score for Americans under 29 is 659. Americans between the ages of 29 and 39 have an average credit score of 677. Americans who are 60 and older have an average credit score of 747. Where do you fall in?
Preparing to Apply for a Car Loan
There is no magic number when it comes to what your score should be if you want to secure a car loan. However, you will need to be prepared for some extra questioning if you have a score that’s below 700. The good news is that your credit score may not be the only factor that determines whether or not you get a loan for a new car. A lender may look at why your score is what it is. You may be looked at more favorably if your score is lower due to debt that you took on while starting a new business. A lender may be willing to overlook a lower score if it turns out that you can prove that you’ve never missed a car payment in your life. You should also be prepared to show documentation that proves that you’ve been paying your bills on time. It can also help your case if you show up with proof of residence, pay stubs and proof that you have full-coverage car insurance.
What Is the Minimum Credit Score for Getting a Car Loan?
There is no official minimum score that’s required to obtain a loan. Most lenders will start to really scrutinize applicants once you get into the territory of having a credit score of 500 or lower. That means you need to show up prepared to provide the right information.
How Your Credit Score Impacts the Interest Rate on Your Car Loan
Lenders consider a person with a low credit score to be a high-risk borrower. That doesn’t mean that you will be automatically excluded from obtaining auto financing if you have a low score. However, it does mean that you will be forced to deal with a higher interest rate on your loan. Here’s what Experian says interest rates look like based on credit-score tiers:
- A score between 781 and 850 can get you an interest rate between 3.68 percent and 4.34 percent.
- A score between 661 and 780 can get you an interest rate between 4.56 percent and 5.97 percent.
- A score between 601 and 660 can get you an interest rate between 7.52 percent and 10.34 percent.
- A score between 501 and 600 can get you an interest rate between 11.89 percent and 16.14 percent.
- A score between 300 and 500 can get you an interest rate between 14.41 percent and 19.98 percent.
A few percentage points may not seem like a lot on paper. However, those differences can add up to thousands of dollars over the life of an auto loan. You should keep in mind that actual interest rates can vary on a daily basis.
Tips for Getting an Auto Loan When You Have a Low Credit Score
What can you do if you are worried about being rejected for an auto loan or getting stuck with a high interest rate? Try your best to wait and save if possible. You can start aggressively paying your bills on time, getting rid of debt and building your credit now if you know that you’ll be car shopping in a few months. You can also focus on saving up for a down payment that will help you to reduce the amount you have to borrow. There is also the option to have someone with a high credit score get a loan with you. Don’t forget that shopping around for a vehicle and financing can help you to get the best deal. You shouldn’t necessarily feel discouraged just because one dealership has turned you down or offered you a rate that just isn’t going to work.