When you apply for a car loan, your credit score plays an important role, just as it does when you apply for a credit card or a mortgage. That said, the credit requirements for auto loans can vary considerably among different lenders. Auto lenders also tend to be more forgiving of imperfect credit than other types of lenders, and it’s often a matter of shopping until you find a lender who will work for you at a reasonable rate.
Here are a few tips that will help you understand the credit requirements for auto loans and how to go about your auto loan search whether you have excellent credit, damaged credit, or you’re new to credit.
How your credit score affects your interest rate
So how much does your credit score affect the interest rate that you pay on an auto loan?
According to statistics compiled by Experian Automotive for the first quarter of 2020, average auto loan rates for various credit score ranges looked like this:
|Score Range||Category||Avg. Rate (New)||Avg. Rate (Used)|
|660 - 719||Prime||4.68%||6.04%|
|620 - 659||Non-prime||7.65%||11.26%|
|580 - 619||Subprime||11.92%||17.74%|
|579 or below||Deep Subprime||14.39%||20.45%|
In general, borrowers with higher credit scores will be able to qualify for lower interest rates. This is because lenders consider them a less risky investment. However, even borrowers with less than stellar credit can qualify for loans that fit their budget.
To get a sense of what kind of auto loan rate is available to you before purchasing your car, you should be sure to compare rates from several different lenders. Monevo lets you compare personalized loan offers from over 30 different banks and lenders online, for free.
If you decide to go with one of the lenders Monevo partners with, you could have access to funds in just a few days. And even if you decide to go with a different lender, it pays to be informed about the rates you qualify for.
The credit score you see may not be what the lender uses
You should always be aware of your credit score before you even apply for an auto loan, or any other loan for that matter. However, it’s important to understand that the credit score you get, whatever the source, almost certainly won’t be the same score that your auto lender will use.
As an example, all three of the major credit bureaus—Experian, TransUnion and Equifax—issue their own credit data, and there are dozens of different credit scores based upon this data. It might be possible that the credit score you have access to is from TransUnion, but the auto lender you apply with is using an Experian score.
Even if you’re looking at a myFICO Score using Experian data, there are many different versions of FICO scores. You might be looking at your FICO Bankcard Score 5, the auto lender might be using FICO Auto Score 8, which will be a little bit different since it looks at credit from the standpoint of an auto lender, and not a credit card lender.
There’s also the fact that the free credit scores typically available from places like Credit Sesame and Credit Karma use Vantage scores, or other “FAKO” scores. That means that they’re not actual FICO scores, but what are known as educational scores. The difference between a FICO score and an educational score can be 20 or 30 points or more. It’s not to say these free credit-checking services aren’t useful—they certainly are—but you need to understand that the number you’re viewing may differ significantly from what the dealership sees.
Down payment to the rescue?
Putting a down payment on an auto purchase can be important to auto lenders because they reduce the lender’s risk. They also reduce the chance that you’ll end up owing more on the car than it is worth shortly after making the purchase.
Zero down payment auto loans have become extremely common in recent years for
Many auto lenders don’t have specific down payment requirements. However, they will limit the amount of the loan, based on both your credit and your income. If the loan is insufficient for the car that you want to purchase, then you’ll have to make up the difference with a down payment.
It can often help your application if you offer to make even a small down payment, say 10%. Increasing your down payment to 20% is even more convincing, since few people make a down payment that large on a car purchase anymore.
The trade-in on your current vehicle can also represent a down payment. So can a cash rebate from the dealer.
According to a recent report on Cars.com, the average rebate on a new car as of March of 2017 was $3,563. If you’re purchasing a new car with a $30,000 purchase price, a rebate of that size would represent nearly 12% of the purchase price. A trade-in or any cash that you want to put down will make the overall down payment even larger.
Unfortunately, cash incentive rebates are not available on used cars. However, you can still use either a trade-in or good old-fashioned cash for a down payment.
When a co-signer can help
If either your credit or your income are insufficient to qualify you for an auto loan, you can always offer to bring in a qualified co-signer. Naturally, your co-signer will have to have strong credit and a generous income.
Though auto lenders don’t generally require co-signers, they can help to strengthen a weak application. This is particularly important if you have little or no credit history. You may need to rely entirely on the credit of your co-signer in order to qualify for the loan.
What if I’ve got a high-rate auto loan that I can’t afford?
Buying a car with less-than-perfect credit can be expensive. You’ll pay a higher interest rate, which means your monthly payment will be higher and you could end up paying thousands in interest over the life of the loan.
If you find that you can’t qualify for an auto loan rate under 9.99%, we strongly recommend you reconsider your car-buying strategy. You can use our car affordability calculator to see how much car you should really be buying, or our auto loan calculator to see how different scenarios will affect your monthly payment.
In the event you’re already stuck in a high-rate loan, you do have some options. Of course, you can sell the car and pay off the loan. While that might be the smartest financial move, it’s hardly realistic if you still need the car for transportation. The good news is that you can refinance your auto loan. If, for example, your didn’t know better and accepted a bad loan deal, or, your credit score has improved since you took out the loan, you may be able to get a lower auto loan rate (and payment) when you refinance.
Keep reading to learn more about how to find refinancing lenders and check your rate.
Where should you shop for an auto loan?
Even with all of the information that is available in regard to car loans, it’s important to understand that these are only averages. The auto loan market is much more decentralized than other loan types, particularly mortgages and student loans. As there are thousands of banks, credit unions, and finance companies making auto loans, the guidelines are specific to each lender. For example, my own credit union will do 100% financing with a minimum credit score of 650. Your bank might require a higher credit score.
Of course, car dealerships want you to finance through them. And in some cases, you should. Dealerships have relationships with multiple large auto lenders and are able to instantly shop your credit application among competing banks. For buyers with excellent credit, this may result in getting a better deal. For buyers with less-than-perfect credit, a dealership may be able to offer an approval, but at a very high interest rate.
If you’re looking for better rates, and have a decent credit score, you should shop your rates before making a final decision. Luckily, there are loan marketplaces that can easily help you shop multiple lenders at once. Credible and Fiona are two examples of these marketplaces.
Both Credible and Fiona make the rate shopping process quick and easy. You’ll need to enter some basic personal information to go through the application process, but this only takes a minute or two. Once you’ve gone through the process, Credible and Fiona will show you a list of rates from various big-name lenders.
Monevo is another online comparison tool that makes the rate shopping process quick and easy. You’ll need to enter some basic personal information to go through the search process, but this only takes a minute or two. Monevo lets you compare loans for free online, with no impact on your credit score.
Understanding your credit score is the key to finding the best rates on any loan, but especially an auto loan. Often, you’ll spend hours and hours researching and negotiating which kind of car you’ll buy, but never look into financing. That’s a mistake, because the interest you’ll pay on your auto loan could cost you thousands of dollars over the life of the loan. Check your credit, understand what rates you should qualify for, and don’t sign on the dotted line until you know you’re getting a fair deal!