Table of Contents
- The majority of auto loans are granted to buyers with good to excellent credit, but it’s possible to finance a car with a low credit score
- Car buyers with fair or poor credit may qualify for loans with much higher interest rates or other unfavorable loan terms
- If you can wait to make a purchase, you can take steps to improve your credit score
- Other options for buying a car when you have poor credit include making a larger down payment, finding a co-signer, and considering a secured loan
When you’re in the market for a new vehicle, your credit score will affect what you can afford to buy. Unless you’re planning to pay the full cost out of pocket, you’ll likely need to consider an auto loan, and that means the lender will check your credit report.
That’s why, before you ever set foot in a dealer, you should know your credit score and what it means for your loan prospects.
Experian data show that more than 67% of auto loans and leases were granted to people with good or excellent credit in the second quarter of 2023, and that means many people with fair or poor scores were able to get financing. But just how low is too low? Here’s what you should know about the minimum credit score for buying a car.
Minimum Credit Score For Getting An Auto Loan
It’s not impossible to get an auto loan with a low credit score, but it’s less likely. According to Experian, only 13.42% of car loans and leases in Q2 2023 were given to people with credit scores between 501 and 600, while fewer than 2% were granted to those with scores of 500 or below.
With two-thirds of loans and leases going to buyers with good or excellent scores, that means a score of at least 660 puts you in a better position to qualify for a loan. The average score of new car buyers in Q2 was 741, while used car buyers came in at 682.
| Credit Scores | % of New Car Loans | % of Used Car Loans |
|---|---|---|
| Excellent (781–850) | 32.20% | 13.85% |
| Good (661–780) | 49.30% | 42.87% |
| Fair (601–660) | 12.94% | 21.24% |
| Poor (501–600) | 5.30% | 19.46% |
| Very Poor (Below 500) | 0.26% | 2.58% |
How Your Credit Score Impacts Loan Terms
Even if you do qualify for a loan with a lower credit score, the loan terms may be prohibitive. Often, lenders don’t provide a simple “yes” or “no” when considering you for a loan. The lower your credit score, the more risk they see, and consequently, the more they’ll protect themselves.
That typically translates to less favorable loan terms. If you have a lower credit score, you’ll likely pay higher interest rates, and you may qualify for a lower loan amount or shorter payback period.
Comparing Interest Rates For Different Credit Scores
In terms of auto loan rates, the differences can be quite significant across the spectrum of credit scores. Here’s how credit scores impacted rates in Q2 2023.
| Credit Scores | Average New Car Rate | Average Used Car Rate |
|---|---|---|
| Excellent (781–850) | 5.18% | 6.79% |
| Good (661–780) | 6.40% | 8.75% |
| Fair (601–660) | 8.86% | 13.28% |
| Poor (501–600) | 11.53% | 18.55% |
| Very Poor (Below 500) | 14.08% | 21.32% |
For many buyers, the rates available for lower credit scores may put a car purchase unreachable. For instance, a 48-month loan for $30,000 would translate to a monthly payment of $693 at 5.18%, but $821 at 14.08%. A buyer with excellent credit would save more than $6,000 over the life of the loan compared to a buyer with very poor credit.
How To Boost Your Credit Score And Land Better Car Loan Terms
If you’re currently saddled with a low credit score and can afford to put off your vehicle purchase, it may be worth taking time to improve your score before you attempt to buy. The time it takes to rebuild credit will depend on your specific negative marks, but it’s often possible to see improvements in a matter of months if you focus on a few important metrics:
- Always pay on time: Payment history is one of the most important factors influencing your credit score, and paying in full and on time will go a long way toward improving your score.
- Keep your balances low: Try to keep the total amount of your credit card balances below 30% of your total credit card limit. The lower you can get this percentage, the more you can improve your score.
- Don’t apply for new credit: Each time you apply for a credit card or loan, the lender will run a hard credit check. This temporarily hurts your score, so it’s a good idea to avoid new applications while trying to rebuild your credit.
It’s also a good idea to pull your credit reports from all three bureaus (you can get free copies here) and look for any errors. Report any inaccuracies to the bureaus immediately, as this may also help you improve your score sooner rather than later.
Other Ways To Finance A Vehicle Purchase
If you’re in urgent need of a vehicle but don’t have the best credit to back up your purchase, you have a few options to consider:
- Make a larger down payment: Putting more cash down may help you qualify for better terms, even with poor credit.
- Bring in a co-signer: If you have a willing friend or family member with good credit, they can help you qualify for a loan with better rates.
- Consider a secured loan: Secured loans such as a home equity loan or line of credit can fetch better rates because they’re tied to an asset. Beware, however, that you risk forfeiting whatever asset you use to secure the loan if you default on payments.
Although a fair or poor credit score may present some hurdles to purchasing a car, these aren’t insurmountable barriers. Explore other options for financing and look for ways to improve your credit score. With a little work, you can find a way to qualify for a car loan eventually.
Frequently Asked Questions (FAQs)
Can I Buy A Car With A 500 Credit Score?
You may be able to qualify for a loan with a 500 credit score, but the interest rate or other loan terms may be unfavorable. Consider making a larger down payment or bringing in a co-signer with good credit to improve your chances.
Which Credit Score Do Most Dealers Use?
Dealers rely on various scoring models to assess your creditworthiness. The most common models are FICO credit scores, FICO Auto Scores, and VantageScore.
Is It A Good Idea To Finance A Car?
That depends on your financial situation, the prevailing interest rates, and what you can afford. Auto loans generally offer low interest rates compared to other types of loans, so they can be a cost-effective form of financing. However, you should consider factors like your credit, along with the down payment and monthly payment you can afford. It’s also a good idea to keep the loan terms as short as possible to avoid owing more than your car is worth as it depreciates.
Does Financing A Car Hurt Your Credit?
Any time you open a new loan, your credit score will typically take a small short-term hit. However, as you make payments on time and your balance decreases, you’ll begin to see your score recover.
Find out more
- How to Build Credit – Effective strategies for building a strong credit history.
- Challenge Items on Your Credit Report – Learn how to dispute errors on your credit report.
- How to Fix Credit – Simple steps to improve your credit score.
- Fix Your Credit Effectively – Comprehensive guide to credit repair.
- Remove Collections from Credit Report – Strategies to clear collections from your credit history.
- Remove Hard Inquiries – Minimize the impact of hard inquiries on your credit.
- Updating Personal Information on Credit Reports – Ensure your credit report reflects accurate personal information.
- Soft vs Hard Credit Checks – Know the difference and how they affect your credit score.
