Car ownership is a lifelong proposition for most Americans. If you’re ready to take that step and your credit score is not top shelf, you need to know what it will take for you to qualify for a car loan.
The need for wheels is often the first time that a consumer seeks to access credit. For many first timers this means that they may not have a stellar credit score, if they have one at all.
This may be for no other reason than that their file is “thin.” A thin file means there is either very little credit history in their credit reports from which to come up with a score or no history at all, making it impossible to score. Estimates are that some 62 million Americans have thin credit files, while around 26 million have no accounts at all. The latter are referred to as “invisibles.”
Also, car ownership is a lifelong proposition for most Americans. Regardless of whether or not this is your first rodeo, if your score is not top shelf, you need to know what it will take for you to qualify for a car loan in either case. Let’s look at this issue a little closer.
What credit score is needed to buy a car?We’ve all heard the ads: “no credit, bad credit, discharged bankruptcies … no problem!” What that really means is that if you have a credit issue, we’ll still sell you a car for a princely price. So, in the end, it depends on how much you are willing (and able) to pay.
Having a seriously thin file, no file at all or even a less-than-stellar score does not mean you can’t get a car loan. What it does mean, however, is that it is probably going to cost you more. When I say cost you more, I mean your interest rate is likely to be very high and you may also have to come up with much more of a down payment.
One of the reasons that car loans are somewhat easier to come by for those lacking credit is that these loans have two unique aspects that make it easier for someone to take a chance on you, whatever your circumstance.
No. 1 is the repo man. If you don’t make your payments, your car can – and likely will – be repossessed in fairly short order. For that reason alone, you must be careful to make your payments on time every time. I’m sure that sounds familiar to you, since that is what I say about all your bills when it comes to your credit score. It is true here, too, but the added incentive is not wanting to have your wheels taken away.
Aspect No. 2 is that before you drive off you will have made a down payment that offers some collateral for your loan, protecting the dealer when No. 1 is activated.
Can I get a car loan with a score of 600?
While the range of credit scores is from 300 to 850, even those new to credit don’t start out with a score of 300. But knowing what the ranges are can be helpful in figuring out if you would qualify. MyFICO.com breaks out the ranges like this: less than 580 is poor, 580 to 669 is fair, 670 to 739 is good, 740 to 799 is very good and 800-plus is exceptional.
So, let’s throw out the poor category and go to the middle of the fair one. Is 600 good enough to qualify? Probably so, but it is likely going to put you in the position of paying more in interest and down payment. According to Experian, the average score for new car purchasers is around 715 and the average score for used car purchasers is about 665.
However, your employment situation and other factors (like your debt-to-income ratio) and previous car loans (especially if it’s the same dealer you’ve borrowed from before) are likely to be considered when you apply and might compensate somewhat for a lower score.
In addition, the lender will consider the type of car you are trying to buy. While you may have your eye on a new vehicle, if your credit score is lacking you may be better served to look at a used car. This is not necessarily a bad thing; a reliable used car is going to cost less overall, which will make for lower payments.
One aspect to consider is whom you seek financing from. As I say in my book, “Credit Repair Kit for Dummies,” you might think about dealer financing if your credit score isn’t the best. Dealers may have more flexibility than a bank or credit union because they can make money on both the sale of the car and the price of lending.
But be careful not to fall into the trap of considering only the monthly payment. You need to consider the overall cost of the car during the term of the loan. Both are important, but it is a common sales tactic to just ask what you can afford every month and back into a deal that way. This often involves a longer payment period, which will cost you more in the long run.
All things being equal, I like the idea of forming a relationship with a credit union if you have time to do so. They are small enough to look closer at your individual situation and may be able to offer a more reasonable rate even if you don’t have the best score.
What credit scores do auto lenders use?
Again, that depends. Each lender and car dealer can choose which score to use, but as we have discussed before, the FICO score and VantageScore are the ones most widely known and used.
FICO also has an industry-specific auto score. This score builds on a generic FICO score with an eye toward predicting the likelihood of your repaying a car loan on time. This score relies heavily on previous car loan experience, which is another reason to be careful if this is your first time borrowing for a car. That’s because it will almost certainly not be the last time and you will want this record to be as clean as possible. Think of your future self here.
See related: What credit scores do mortgage lenders use?
How to improve your score before buying a car
As with any major purchase, it is a good idea to know where you stand before you jump in. I recommend that you get copies of your three credit reports, at AnnualCreditReport.com, and scores and make sure they are correct. If you find errors, take the necessary steps to have them corrected or removed. Allow three to six months to go through any hoops needed to clean up your credit report.
Use that time to be sure that you pay all of your obligations on time and watch your usage on any credit cards you may have. Keeping the credit utilization ratio – the amount of your credit card’s total credit limit(s) you have used – below 25% will certainly help. If you have any outstanding debts that are past due, this is the time to catch up.
Lastly, don’t open any new accounts if you can help it. Inquiries from new credit will lower your score. Doing these simple things will put you in a much better position to get the car you want at the best price available. This is also when you might take my advice and start that relationship with a credit union.
Remember to keep track of your score!