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If you worry that your credit score could keep you from buying a car, you underestimate how much car dealers want to sell you one. But a higher score will almost certainly get you a lower interest rate.
At the end of June 2020, the average credit score for a new-car loan was 721, and 657 for a used-car loan, according to an Experian report.
But almost 30% of car loans went to borrowers with credit scores below 600, according to Experian. Almost 4.5% of used-car loans went to those with scores below 500. (Less than 0.4% of new-car loans did, though.)
Car loan rates by credit score
Someone with a score in the low 700s might see rates on used cars of about 6.05%, compared with 17.78% or more for a buyer with a score in the mid-500s, according to data provided by Experian.
On a $20,000, five-year loan, that’s a monthly payment of about $387 for the buyer with better credit versus $505 for the buyer with bad credit. The buyer with better credit would pay about $3,222 in interest over the life of the loan, while the buyer with lesser credit would pay $10,329. Plus, in most states, bad credit can mean higher car insurance rates, too.
Average APR, new car
Average APR, used car
Deep subprime: 300-500
Source: Experian Information Solutions
Below 700? Be prepared to explain
If your score is below about 700, prepare for questions about negative items on your credit record and be able to document your answers, says Mike Bradley, internet sales manager at Selman Chevrolet in Orange, California. Matt Jones of the automotive shopping site Edmunds.com says the number may be closer to 680.
Both men say they’ve seen people get financing — sometimes even top-tier financing — with scores that are much lower.
Although it’s possible to get a loan with a low score, “anything under 500 is a flashing red light,” says Dave Cavano, who manages the car-buying service for Auto Club of Southern California.
That means you won’t qualify for an attractive interest rate, but it doesn’t mean you can’t get a car.
What to expect in the finance office
If you’re concerned about approval, prepare by focusing on the positives in your financial life. Remember, people with major blemishes on their credit are routinely approved for car loans.
For example, someone who has a low score from a business debt but hasn't missed a car payment in 20 years may be approved. You're also more likely to get financing if you have a stable job, own a home and/or put down a substantial down payment. (Bradley recommends 25%.)
Buyers may need to show pay stubs, proof of residence, cellphone bills and proof of current full-coverage auto insurance, he says. “If you come in with all your ducks in a row, we can get you a car,” Bradley says.
Cavano says if you have a low score, be prepared to document that you've been paying bills on time for the past six to eight months. If you were late in the past, be ready to explain why, he advises. “Lenders want to hear that you’ve overcome issues and can prove it,” he says.
If one dealer tells you your score isn't strong enough, you still might be able to get financing (or financing at a lower rate) elsewhere, Jones says. A big dealership with a lot of sales is likely to have arrangements with lenders that specialize in finding financing for people with credit challenges, he says.
Does a car loan build credit?
Having a car loan can build credit in two important ways: payment history and credit mix.
Payment history is your track record of paying bills on time. It accounts for more of your credit score than any other single factor. Traditional lenders report your payments to the three major credit bureaus, which provide the data to calculate your credit scores. (Note: Buy-here, pay-here lenders often do not report payments to credit bureaus. These loans not only tend to have high interest rates, they also won't help you build credit if payments aren't reported.)
Credit mix means whether you have both installment loans (with equal payments over a set period) and revolving credit (variable payments and no set end date, as with credit cards). If you have mostly — or only — credit cards, adding a car loan may help your score a bit.
Before you go shopping
It’s smart to have some idea what dealers will see when they check your credit profile. You can get a free credit score, updated weekly, from NerdWallet.
A free score, so long as it’s on a 300-to-850 scale, is likely to give you a rough idea of where you stand so you aren’t disappointed if you don’t get an advertised interest rate.
You can also buy your FICO automotive score through the company website. That score gives more weight to how you have repaid car loans in the past.
Many lenders use auto-specific credit scores that weigh past car-loan payments more heavily.
If you have time to delay your car purchase, work on building your credit. That means:
Paying every bill on time.
Keeping credit card balances low relative to credit limits.
Not applying for other credit within six months of applying for a car loan.
Keeping old credit cards open unless there's a compelling reason to close them.
If you’ve already signed the dotted line on a higher-rate loan, keep an eye on your scores. You may be able to refinance your auto loan at a lower rate after you’ve made on-time payments for six to 12 months.