Auto Loans 101: What Credit Score Is Needed to Buy a Car?
Bad credit doesn't always have to stand in your way when buying a car.
Contributing Writer at Tally
September 13, 2021
Buying a new or used car can be an exciting experience, but things can get tricky once you get to the credit check. If you have good credit, you generally will get the best rates and have a wide range of lenders from which to choose. With bad credit or no credit, things get more complicated.
You may find yourself running into countless rejections and other issues. This leads some car buyers to wonder what credit score is needed to buy a car.
Below, we'll discuss the minimum credit score requirement to buy a car, how your credit score impacts an auto loan and ways to overcome a low credit score.
What credit score is needed to buy a car?
There's no shortage of credit scoring models available. Still most auto lenders will look at your general FICO credit score, which ranges from 300 to 850, or your FICO Auto Score, which ranges from 250 to 900, to determine eligibility. The latter is more tuned for the risk tolerance of auto lenders.
Lenders can pull your FICO score based on any combination of the three major credit bureaus:
Some lenders base it on only one credit reporting agency, while others may base it on an average of two or the middle score of all three. This adds to the wide range of credit scores you may have.
Creditworthiness for an auto loan varies between lenders.No hard-and-fast rule says you need a specific minimum credit score to finance a car. Some lenders specialize in bad credit car loans and can finance virtually anyone with a down payment and high-interest rate. On the other hand, some lenders have strict requirements and approve very few subprime borrowers.
The creditworthiness rankings in auto lending are as follows:
781 to 850: Super prime
661 to 780: Prime
601 to 660: Nonprime
501 to 600: Subprime
300 to 500: Deep subprime
How can your credit score impact your loan terms?
While there's no specific rule on what credit score you need to get approved for a car loan, your credit score directly impacts your loan.
The key area where your credit score significantly impacts your auto loan is its interest rate. According to Experian's "State of the Automotive Finance Market" report for the second quarter of 2021, the average auto loan rate on new-car financing ranged from 14.59% for deep subprime borrowers to just 2.34% for super-prime borrowers.
The full range of credit tiers and their respective average new-car auto loan interest rates are as follows:
Deep subprime: 14.59%
Near prime: 6.61%
Super prime: 2.34%
For used cars, the average interest rates in the various credit tiers were as follows:
Deep subprime: 20.58%
Near prime: 10.49%
Super prime: 3.66%
These interest rates impact the remaining aspects of the loan term, including loan length, monthly payments, financing amount and more.
What do lenders need to approve your auto loan?
For those with excellent credit, lenders often ask for little to no documentation. However, borrowers with lower credit scores will often need to present specific information for approval.
Proof of income
When you apply for a car loan, you must include your income, but the lender will want you to prove this income. You can do so via pay stubs from your employer or an employment verification letter.
If you're a freelancer or independent contractor, things get trickier. These borrowers will often need several months of bank statements and the last two years' tax returns to prove income.
Home lease agreement
The lender may also need to verify how much you pay per month to rent your home or apartment. They can verify this via the lease you signed with your landlord or a letter stating the lease terms.
Proof of residency
In some cases, the lender will also want proof you live where you claim you do. You can prove residency via a lease agreement, utility bills or your driver's license. Some lenders will accept a signed affidavit from your landlord or the homeowner if you're staying with a friend or family member.
Letters of explanation
In some cases, a lender will approve you with some negative marks on your credit report, but they may want letters explaining the issues that caused these negative marks. You can type these up, sign them and present them at the dealership.
Should you bring your financing or finance at the dealership?
When financing a car, you have the option of securing financing first at a bank or credit union or going to the dealership and financing through one of its lenders. There are benefits and drawbacks to each option.
Bringing your financing
When you go to the bank and secure your financing, you can save a few points on interest. Many dealerships will market your credit to multiple lenders and get the lowest buy rate, which is the lowest interest rate a lender will offer. The dealership will often add a few points to this buy rate and sell it to you. The additional points are profit for the dealership.
You could get a lower interest rate when you bring your financing because you bypass this markup.
Bringing your own financing also means you already know the maximum loan amount and the repayment terms before shopping for a car. This could streamline the shopping process, as you're essentially walking into a dealership as a cash buyer.
However, securing your financing can be a time-consuming process. Plus, you may miss out on special offers available only if you finance through the dealership — though these deals are generally limited to new cars only.
Financing at the dealership
By financing at the dealership, you get the added benefit of having access to all the dealer's financing options. The dealer can shop your credit to multiple lenders and get the strongest possible offer for you.
Plus, the dealership may have special offers available for using its lending partners, like low-interest financing or rebates. These offers are usually limited to new cars and financing through a captive financing company the automaker owns, such as Toyota Motor Financing or GM Financial.
Dealerships also have special relationships with lenders and may be able to get poor credit situations approved — even if you couldn't get approved on your own.
As mentioned, the downside to financing at a dealership is they can mark up your interest rate, costing you more money in the long run.
What other auto financing tips can help get you approved?
With a good credit score, getting an auto loan is relatively simple. However, if you have a low credit score, you can run into some struggles. Here are a few tips to help you get approved and get the best interest rate possible, even with a low credit score.
Bringing a cosigner
A cosigner signs up for an auto loan with you and shares equal responsibility for the debt. If you have a friend or family member with good credit who's willing to be a co-signer, their good credit can help you get approved and may even significantly lower your interest rate.
Increasing down payment
Lenders want to see you have skin in the game, and they do so by asking for a down payment. The higher your down payment, the less risk the lender has of losing money, which can turn a rejection into approval or lower your interest rate.
If your DTI ratio is the reason your loan was rejected, a larger down payment can lower your monthly payments. This lower car payment could help get you under the DTI ratio.
Shortening the loan terms
The longer you finance a vehicle, the riskier it becomes you'll default on the loan — at least in most banks' eyes. If you shorten your loan term, you'll often get a lower interest rate. Sure, that shorter loan term will increase your loan payments, but you'll save cash on interest over the entire loan.
Going for a new vehicle
While the value is almost always in buying a used car, their financing terms are generally not as favorable as new cars. If your only concern is the interest rate and monthly payments, then going with a new car over a used car may be beneficial.
Yes, you may have to drop down in car class or forgo a few features to keep the prices close, but the new car loan will almost always have better interest rates and financing options.
No minimum credit score to buy a car
While there's no minimum credit score needed to buy a car, your credit score still matters. With a low credit score, you may find the car buying process more difficult, as you'll have limited lenders to choose from. Plus, those lenders often give higher interest rates to buyers with low credit ratings, resulting in higher monthly payments and costs throughout the loan.
You can combat this with a handful of tactics, like getting a cosigner, increasing your down payment or opting for a new vehicle over a used one.
If excessive credit card debt keeps your credit score down, Tally† can help with its credit card repayment app. Not only does the Tally app combine all your credit cards into one easy monthly payment, but it also includes a lower-interest line of credit you can use to pay down your higher-interest credit card debt quicker.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.