What's the Minimum Credit Score for a Car Loan?

What's the Minimum Credit Score for a Car Loan?
What's the Minimum Credit Score for a Car Loan?
| Jan 19 2023
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Your Credit Score and Loans: What You Need to Know

When you buy a car, there is nothing that affects the car loan APR you will be offered more than your credit score. While it is not the only factor that will affect your approval and interest rate, it is hard to over exaggerate the importance of a healthy credit score.

But what happens if your score is less than ideal? Is it still possible to get a car loan?

Here’s the minimum credit score you need to secure a car loan (and why you should work on increasing your score).

How do credit scores work?

Credit scores are three digit numbers that are used by lenders to determine the creditworthiness of an individual. While there are a few different credit scoring models out there, the most commonly used credit score is FICO. There are three major credit bureaus that calculate and monitor these scores–Experian, TransUnion, and Equifax. Credit scores are calculated based on five different aspects of your credit history.

Payment History

Your payment history looks at how punctually you pay your bills. If you pay your bills in full and on time, that will help your credit score tremendously. Your payment history accounts for 35% of your credit score.

Accounts Owed

The accounts owed section looks at how much overall debt you are in and how that number compares to the amount of credit you have available to you. This ratio is called your credit utilization ratio, which is calculated for each individual account as well as for your overall debts. You want your credit utilization ratios (and total ratio) to be less than 30%. This accounts for 30% of your total credit score.

Length of Credit History

This section looks at how long you have had your accounts open. If you have had your accounts open for a long time with a good payment record, this will help your score. This accounts for 15% of your credit score.

Credit Mix

This looks at how varied your different accounts are. Lenders like to see a mix of accounts to see that you can handle different types of bills and debts well. Having a mix of credit cards, loans (student, car, personal), and/or a mortgage will help your credit score. This accounts for 10% of your total score.

New Credit

This looks at how many new accounts you have open. Since you have not had a chance to prove that you can pay these debts and handle these accounts, your score will be lower if you have new accounts. This accounts for 10% of your total credit score.

What do lenders look for when buying a car?

When you are looking to buy a new car, lenders will look to make sure you are in good financial standing and can pay the loan back in a timely manner. They will require certain paperwork to guarantee a loan.

Proof of Identity

Lenders want to make sure that you are, well, you. Lenders are actually required by federal law to check for identification. Typically a driver’s license or passport will be enough.

Proof of Residence

Federal law also requires that lenders ask for proof of residence. If your address is accurate on your driver’s license, that may be sufficient. If you recently moved however, you may need to provide a certified piece of mail, such as a utility bill, rental agreement, or mortgage statement.

Credit Information

Lenders will ask for your social security number when you apply so that they can pull your credit score and credit history. Your credit score will fit into one of five categories:

  • 800 to 850: Excellent credit
  • 740 to 799: Very good credit
  • 670 to 739: Good credit
  • 580 to 669: Fair credit
  • 300 to 579: Poor credit

Lenders will reserve the best car loan APRs for those with excellent and very good credit (above 740). But if your score is below that, all is not lost. But it does mean that the lower your score is, the higher the car loan APR you are offered will be. Because of this, it’s really worthwhile to spend the time to improve your credit before applying. Typically getting your score above 600 will help you secure a car loan.

Proof of Employment

Proof of employment is another factor that can help prove that you can pay back the loan you are taking out. Lenders will typically want to see pay stubs from the several most recent paychecks you’ve received. If you are self-employed, lenders will want to see your tax returns from the past few years to verify that you have a secure income.

Vehicle Information

Lenders will want to see exactly what car you are purchasing as well. They will want to see:

  • The purchase price
  • Vehicle identification number (VIN)
  • Year, make and model of the car

If you are buying from a dealer, they can provide this information to the lender. If you are buying a car privately, you will need to show the lender a bill of sale and purchase agreement.

Proof of Insurance

Since the car will technically belong to the bank until you finish paying off, your lender may have specific coverage requirements for the car you are buying. You will at the very least need to prove that you meet the state’s minimum for coverage.

Your Method of Down Payment

Lenders will also want to know how you plan on making your down payment. You should always make a down payment, even if you are eligible for a promotion that doesn't require a down payment. Down payments can help prevent your loan from becoming underwater and can make your monthly payments more manageable. You should aim to put down at least a 20% down payment. You can pay your down payment in several ways, including a cash, check, or credit card.

How fast will a car loan raise my credit score?

It may sound counterintuitive, but getting a car loan can actually improve your credit score in some circumstances. Adding a car loan can help add to your credit mix, showing lenders that you can handle different types of loans. And if you are consistently making on time, full payments to your car loan this will help improve your payment history.

When you get a new car loan, it will temporarily cause your score to dip at first however. This is because it is a new account, so it will affect the new account category of your credit score. The application process will also count as a hard inquiry on your account, which will also result in a slight dip. Your credit length will also be affected.

But getting a car loan that you can afford and can make consistent payments on will eventually help your credit score. If you are having trouble with your payments (i.e. having trouble paying them in full or on time), it may be worth it for you to refinance your car loan. Refinancing allows you to start your car loan over essentially, with a different repayment plan and different car loan APR.

Qualifying for a lower car loan APR will save you money every month while also saving you money over the life of the loan. If you are having trouble making payments every month you can also refinance to a longer repayment period. This will allow you to pay the loan off over a longer period of time, greatly reducing the amount you will have to pay every month.

Having a car loan that is within your budget that you can make regular full payments on will ultimately increase your credit score. But if you want to raise your credit score there are other steps you can take as well.

  • Pay all of your accounts on time and in full. Utility payments are generally not included in your credit score, but it’s good to ensure those are all caught up to. After all, if you fall behind and get put into collections, that will end up affecting your credit score quite negatively.
  • Request a copy of your credit report. Review it thoroughly for any errors or mistakes. Catching an issue can help your score greatly.
  • Request higher credit limits on your accounts. This will improve your credit utilization ratio, which is a huge factor in your credit score.
  • Pay down your debts strategically, starting with those with the highest credit utilization ratio. For example if you have one account where you owe $2,000 and your credit limit is $3,000, and another account where you owe $3,000 when the credit limit is $8,000, you should prioritize paying the first account. This will help your credit score more.

That’s what lenders look for when approving car loans (and why having a good credit score matters).

It’s not impossible to get a car loan if you have a low credit score. But it will be much more beneficial to you to improve your credit score first so that you can secure the best car loan possible.

If you are looking to refinance your loan and save money, Auto Approve is here to help. Get in touch today to find out just how much you can save! 


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