Purchasing a new or used car is an exciting experience. However, it also represents a major financial decision that can impact your budget for years to come. One of the most important factors that determines how much your auto loan will cost is your credit score.
Your credit score gives lenders an idea of how reliably you have repaid debts in the past. The higher your score, the less risky they believe you are as a borrower. As a result, higher credit scores can qualify you for lower interest rates and better loan terms from lenders.
So what credit score do you need to get a competitive auto loan? What range should you aim for? This comprehensive guide examines credit scores and auto lending in detail to help you understand where your credit stands and how to get the best financing deal.
How Credit Scores Work
Before diving into auto loan credit score requirements, it helps to understand what exactly makes up your credit score. The three major consumer credit bureaus — Equifax, Experian, and TransUnion — use the information in your credit report to calculate a three-digit credit score ranging from 300 to 850.
The most common scoring model used is FICO, developed by the Fair Isaac Corporation. It examines five main factors from your credit history to determine your score:
- Payment history (35% of score) – Whether you paid credit accounts like credit cards, loans, and mortgages on time. Late payments can lower scores significantly.
- Credit utilization (30%) – The percentage of available credit you are using. High balances hurt scores. Ideal is below 30%.
- Credit history length (15%) – How long you’ve had credit accounts opened. Longer history improves score.
- New credit (10%) – Opening many new accounts recently can lower scores temporarily.
- Credit mix (10%) – Having different types of credit (credit cards, loans, mortgages, etc). Variety helps the score.
As you can see, responsible credit habits like making payments on time and keeping balances low are rewarded with higher scores. Poor habits like late payments lead to lower scores. Auto lenders refer to your credit score (along with other factors like income) to make lending decisions.
Credit Score Ranges and Impact on Auto Loans
Not all credit scores are evaluated equally by auto lenders. Scores are grouped into different tiers, and each tier correlates with certain interest rates and loan terms you can expect during the application process.
Here is an overview of the most common credit score ranges and what they mean for your auto loan:
Poor Credit Scores (300-579)
This near-subprime to deep subprime score range will make getting approved very difficult and will lead to the highest interest rates from any lenders willing to work with you. You can expect rates of 10-20% or higher, significant down payment requirements, and less flexible loan structures. With poor credit, your options are extremely limited so it’s critical to improve your score before applying.
Fair Credit Scores (580-669)
Applicants in the fair credit range can typically get approved for an auto loan but should still expect to pay higher interest rates due to the elevated risk. Average rates for fair credit tend to fall between 8-16%. You may also face lower maximum loan amounts and shorter repayment term options with fair credit. Shopping around is important to get the best deal possible.
Good Credit Scores (670-739)
Once your score enters the good credit tier, you will start to see more competitive interest rates from lenders. Approved applicants with good credit can often qualify for rates of 4-8%, depending on the lender. More flexible loan terms and lower down payments may also be available compared to fair credit.
Very Good Credit Scores (740-799)
In this range, you have very good to exceptional credit according to most lenders’ standards. Interest rates can dip as low as 2-5% for preferred applicants with very good scores, which saves substantially over the life of the loan. Lenders will often approve higher loan amounts and more favorable structures as they perceive you as a low-risk borrower.
Excellent Credit Scores (800-850)
Top tier credit in the excellent range qualifies you for the very best auto loan rates and terms. You may see rates ranging from 0-3% for highly qualified borrowers. Loan approvals, amounts, terms and lack of fees also become most flexible with an exceptional score. Maintaining excellent credit requires diligence but offers huge savings.
As you can see, auto loan rates and terms have a high correlation with your credit score tier. Every step up in your credit score makes financing more affordable, so it pays to monitor and maintain the highest score possible before applying.
What is the Minimum Credit Score for an Auto Loan?
Technically, there is no defined minimum credit score set in stone to qualify for dealer or bank auto loan financing in most cases. Many lenders actually advertise no minimum credit score requirement. However, scores below 580 are universally considered deep subprime and will have very few lenders willing to extend credit.
Most major banks and dealerships try to avoid lending to applicants below 620 credit score if possible. It represents high risk with average rates already in double digits. Around a 600 credit score is typically the lowest most traditional auto lenders will consider approving, and even then terms are less than ideal.
Subprime lenders who specialize in bad credit auto loans are more willing to work with credit scores in the 500s but offer extremely high interest rates. These types of subprime auto loans should be avoided if possible because they are very expensive over the long run. Improving your credit or saving a larger down payment is the better financial decision when below 600 credit score.
How Age Impacts Auto Loan Credit Score Requirements
An important qualifier to standard auto loan credit score requirements is your age. Young borrowers under 25 often face stricter standards during the application process. Because they have short or no credit history yet, auto lenders view younger applicants as much riskier, even with decent credit scores.
For borrowers under 25, having fair or average credit may not be enough to get approved for a competitive rate auto loan. Many lenders like to see at least a good credit score (670+) and steady income before they are comfortable lending at lower rates to young applicants with short credit histories. Otherwise, they apply tougher standards and require cosigners.
The takeaway is if you are in your teens or early 20s, aim to build your credit score to at least the good range before applying for an auto loan to improve the likelihood of getting approved for prime rate financing. As you get older, lenders become more flexible with credit scores minimums.
When Should You Check Credit Scores for an Auto Loan?
Timing is an important consideration when it comes to checking your credit score for a pending auto loan application. There are a few strategic times that make sense to verify your latest credit score:
- 3-6 months before applying – Gives you time to improve score if needed to qualify for better rates
- 1-2 months before applying – Ensure your credit standing hasn’t changed ahead of finalizing application
- At loan application – Compare your verified score to minimums and evaluate loan offer
- Before accepting loan terms – Make sure your rate aligns with your actual credit score
Checking your score both a few months early and right as you apply ensures there are no surprises and you get the most accurate picture of where your credit stands for the auto loan process. Don’t rely on old credit scores – always verify right before major financing activities.
How Do Auto Lenders Check Your Credit?
When you apply for an auto loan, lenders will perform a hard inquiry on your credit report to examine your full credit history and calculate credit scores. They use this information combined with your application details to make a lending decision. Here are some key facts about credit checks for auto loans:
- Auto lenders typically check your credit from one of the three major bureaus – Experian, TransUnion, or Equifax. Each bureau may show a slightly different score.
- Hard inquiries can result in a small, temporary drop in your credit score. Too many in a short period can be seen negatively.
- Lenders may use your lowest credit score if you have different scores across bureaus.
- Your credit history details are more important than just the score number itself when evaluating your application.
- Auto loan inquiries usually count as just one hard credit check if made within a short period as lenders understand car shopping requires checking with multiple lenders.
Overall, expect the auto lender to thoroughly examine your credit report, which makes having good credit so important for the best rates and loan terms.
How Else Can I Get the Best Auto Loan with My Credit Score?
Your credit score is just one piece of the puzzle when it comes to qualifying for a great auto loan. Here are some other keys to improve your chances and get approved for the optimal loan terms:
- Shop multiple lenders – Compare loan offers from banks, credit unions, and dealerships. Avoid just going with whichever lender the dealer recommends.
- Get prequalified – Being prequalified gives you leverage to negotiate the best rates once you find a car to purchase.- Consider getting a cosigner – Adding a cosigner with better credit may help you qualify for a lower rate if you have fair credit yourself. Just be sure the cosigner understands the obligation.
- Make a larger down payment if possible – Putting down 20% or more shows lenders you are financially committed and lowers risk. This can help offset fair credit.
- Know your budget – Only apply for a monthly loan payment you know you can truly afford based on your income and expenses. Don’t overextend finances.
- Review loan terms carefully – Look for the lowest rates but also consider the loan term length, fees, prepayment penalties and other factors that impact costs.
- Ask about discounts – Some lenders offer discounts for setting up autopay, taking a financial course, having a relationship with them, etc. Inquire to maximize savings.
- Understand the lender may counteroffer – Especially if you have fair credit, expect a counteroffer with a higher rate or different loan structure if the lender deems you too risky for the initial offer.
- Negotiate respectfully – Politely ask if the lender is able to improve the rate or terms. Provide competing offers as leverage if needed.
- Maintain your credit – Keep up credit management best practices even after getting approved to have strong credit for future auto loans.
Using these tips in addition to examining your credit score will put you in the best position to secure favorable auto loan financing.
- Auto loan interest rates and terms have a strong correlation to your credit scores. Higher scores lead to lower rates.
- Good credit (670+) scores are generally required for competitive prime rate auto financing from most lenders.
- Check your credit score a few months before and right as you apply for an auto loan to make sure it’s optimal.
- Make on-time payments, lower balances, and limit hard inquiries to help maximize your auto loan credit score.
- Shop multiple lenders and negotiate respectfully to get the best possible deal based on your credit standing.
Frequently Asked Credit Score Questions for Auto Loans
Q: How long does a hard inquiry from an auto loan application stay on your credit report and impact your score?
A: Auto loan inquiries can stay on your credit report for up to two years but their impact on your score diminishes quickly. Typically the score drops less than 5 points and returns to normal within 6-12 months as long as no additional inquiries are made during that time.
Q: If you are approved for an auto loan, can the lender change the interest rate later based on your credit?
A: No, the agreed loan interest rate cannot be increased by the lender after final loan approval and signing, even if your credit score goes down or changes over the loan term. The rate is locked in based on credit at application.
Q: Can being denied for auto loans hurt your credit score?
A: Initial application inquiries may result in a small temporary drop in score. However, being denied by itself does not directly hurt your credit further. Just avoid too many applications over a short period.
Q: How long does it take to improve your credit score by 50-100 points or more?
A: Depending on your starting score, it typically takes around 6-12 months to potentially improve your credit score by 50+ points with diligent financial habits. It may take longer the higher your score gets.
Q: Is it possible to get an auto loan with no credit history?
A: It is challenging but possible in some cases if you have strong income, make a large down payment, and apply with a cosigner that has excellent credit to offset the lack of credit history. Most lenders will want to see at least some history in your own name first.
A thorough understanding of how your credit score impacts auto loan interest rates, terms, and approvals will empower you to manage your credit wisely. Excellent scores in the 700s and higher open doors to the most affordable loan offers, while poor credit in the 500s shuts them.
Check your scores well in advance, dispute any errors, pay bills on time, lower balances, and comparison shop lenders to maximize positive results. With good preparation and diligent research, you can feel confident walking into a dealership or lender to discuss financing options for your next car.