What Credit Score is Needed to Buy a Car?
Buying a car takes a considerable part of your financial decision, and that is why it is always better to pay in cash if possible. However, for most people, buying a car is the second-largest purchase they will ever make. As a result, borrowing money is the only way to make their dreams come true.
Financial advisors recommend that you do your homework well before shopping for a car loan so that you can get the best interest rates possible on the market.
Usually, this rate is a primary part of your credit score. So, do you think it would be easy for you to qualify and what credit score is needed to buy a car? Unfortunately, while researching this question, I discovered many lenders don't want to talk about this.
I kept digging and analyzing various sources to get to the bottom-line number. Finally, I discovered that a few lenders might approve a car loan with a credit score as low as 500. Such a score can qualify you for a loan, but the interests are high.
What Credit Score is Needed to Buy a Car?
We usually recommend building your credit score before getting a car loan. But if you cannot wait for a few months, we suggest you do some homework. Doing this will help you save a lot of money on your dream car loan.
In this, I will give you hidden tips and tricks about credit scores as they relate to car loans and walk you through the steps to help you get the best rates possible in the market for your distinct situation.
What is a Credit Score?
Typically, a credit score is a three-digit number ranging between 300 and 850. It represents your credit risk and the likelihood of clearing bills on time.
The lender calculates your credit score using a credit report, including your payment history and the amount of debt you've not cleared, and the length of your credit history.
Do you have a higher credit score? If yes, it means you have demonstrated your responsible credit behavior in your past. As a result, most lenders become confident with you when evaluating and validating your credit request.
Here is how a credit score table looks like:
Poor credit with an average interest rate of 17.08% for a new car and 17.50% for a used car
Fair credit, with an average interest of 12% for a new car and 12.32% for a used car
Good credit with an average credit of 11.68% on a new car and 11.90 for a used car
Very good credit, with an average of 5.09% for a new car and 5.40% for a used car
Excellent credit with an average interest of 4.90% for a new car and 5.28% for a used car
Note that different scoring models and other data are involved when calculating your credit score, such as your income.
Lenders and creditors like car dealerships, banks, credit card firms use your credit score to check if the amount they will offer you is a loan or a credit card.
Why is it So Important to Have a Good Credit Score?
As we observed, individuals with a higher credit score receive more favorable credit terms, which translates into a lower payment and less paid over the lifetime of their account.
Keep in mind that, like how each person has a different credit situation. Different lenders also have unique criteria for offering credit; this includes how they view your credit information.
Additionally, the type of credit score used by lenders and creditors varies depending on their industries. For example, if you plan to buy your dream car, your car dealership might use a credit score emphasizing your payment history over any other information regarding auto loans.
Credit scores vary depending on the score model used and the credit bureau that furnishes the credit report. That's because some creditors do not report to all three credit bureaus nationwide.
What is the Minimum Credit Score Required to Buy a Car?
If you are going to apply for a car loan, your lender must check your credit score. Most lenders usually use different credit rating tools to evaluate and validate your auto loan request.
Most of these credit score tools have a scoring system ranging between 300-850. However, when I was doing my research, I found out that larger lenders use a custom scoring model built on either house statistics or third parties.
In my study, I found out that the bare minimum credit score to qualify for a loan in 2021 is 450.
Looking at myautoloan.com, one of the largest online vehicle marketplaces, there is no data for interest rates for credit scores below 451. And for popular credit rating platforms, myFICO.com doesn't have data for credit scores below 500.
For this reason, it is obvious the lender will determine what your credit score rate that you are eligible for and then choose the amount to lend you. However, keep in mind that there are other factors that your lender may consider when determining how much to lend you and the interest rates.
Some of these factors may include your income, employment history, your outstanding debts to income ratio.
Credit Score and Car Leasing
Having an excellent credit score is always important when you are only buying a new car. However, in most cases, a good credit score is high enough to get you a new car for a great deal and is not enough to get you a good deal on car leasing.
Although these leases are available to Subprime credit buyers, they have become very expensive compared to mainstream auto leases.
Remember that if you have poor credit when leasing a car, you will be asked to pay more upfront and pay a higher interest. In addition to this, even an average credit score cannot meet the credit needs set for subsidized lease deals.
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Credit Score on Auto Insurance
Loan terms and interest rates are not the only things that are affected by your credit score. For example, in most states today, auto insurance is affected by your credit history, especially when determining premiums.
The practice became legal since auto insurance firms had a huge correlation between credit score and claim rates.
According to a study by US News, results suggest that people with bad credit pay more on car insurance than people with an average score. For example, a person with a poor credit score must pay an average representative price of $2400 each year, while an individual with an average score pays 1250 per year.
What is the recommended credit score to buy a car?
According to myFICO.com, the preferred credit score when buying a car in 2021 is 730. Also, myAUTOLOAN.com identifies 730 as the score you need to qualify for the best loan rates.
I agree that an excellent figure should be a threshold for your financial decision-making process on taking out a loan on a car.
I don't recommend you take a loan with a credit score below 730, since the lower the credit score, the bigger the financial hit. Instead, it would be best to build your credit score to get a better deal if you took a few months to build your credit score.
What are the Advantages of Having a Lower Interest Rate?
Some of the advantages of having a lower interest rate include:
1. Lower monthly payments
When you have lower interest rates, it means your monthly car payment will be smaller.
When we look at the myFICO.com loan saving calculator, it shows that you have to pay interest depending on your credit score. Generally, the numbers on average credit score rates from lenders nationwide start from $30000 within 48 months.
From this report, most people borrowing $30000 to repay within 48 months were for used cars.
The numbers above are for four-year loans. However, according to 2020 data from the credit bureau, the average loan term used was 65.01 months and 69.50 months for new cars.
I strongly recommend people not to go after loans that are longer than 40 months. Why? Because if you opt for loans over 40 months, the vehicle you are having your eyes focused on might have already started deteriorating.
For this reason, you will be forced to buy a more expensive car whose price goes beyond our budget.
2. Higher loan amount
When it's time for me to shop for a car, I prefer getting my monthly payment as little as possible.
However, under exceptional circumstances, you may opt to purchase a more expensive vehicle for a reason. For example, if you have a child on the way, you may want to upgrade your sedan to a minivan.
It's easy to tell that the lower the interest rates you can get, the more you can borrow. Unfortunately, most people fall for this, leading them to a trap of financial instability as time goes by.
For this reason, you'll need to be smart and go through your budget and decide what you are comfortable paying monthly. In addition to this, ensure the amount you borrow doesn't go beyond 40 months of repayment.
Ways to Build Your Credit Score Fast?
While your average credit score can get destroyed over time, you can rebuild it in a matter of months. Indeed, there are several ads that promise to improve your credit score instantly at a fee.
However, I highly advise using the right way, which is a long process. And that is why it is essential to view credit report before you consider purchasing or upgrading to a new ride.
Let us look at some ways you can hurt your score and ways you can improve it.
What Destroys Your Credit Score?
Some of the things that ruin your credit score include:
1. Missing payments
Missing payments on credit cards, auto loans, and other obligations are some of the minor things that negatively impact your credit score.
The best way to avoid this is to sign up for automatic payments on your checking account and follow them up with a reminder using online tools. You can access these tools using your smartphone or laptop and ensure all the bills are fully settled at the end of each month.
2. Late payments
Late payments are awful, like missing payments, since late payments are usually reported to the credit bureau as a remiss or other obligation. So, the best way to solve this is similar to that of missing payments.
If you know you are liable for late payment, I recommend that you reach out to your lender and inform them of the late payment. If you are their long-term customer, this is not going to ruin your credit score immediately.
3. Opening and Closing Credit Cards
After you successfully apply for a new credit card, the bureau gets notified that you are about to incur more debt. Often, this applies whether it is an auto loan, mortgage, or any other type of loan.
In addition to this, the bureau can recognize when similar inquiries relate to the same purchase, like an auto loan or mortgage. For this reason, it is important to do your car loan shopping in a short period.
4. Co-signing a loan with your family member or friend
Co-signing a loan with someone else is always a bad idea. You may think you are kind, but you are also responsible for the entire loan. If that individual you are co-signing the loan with fails to pay on time. That risk is reflected in both of your credit reports.
If they also make late payments, the risk is also reflected on your credit score as well as on theirs. If your partner fails to clear the balance, the lender can come after you and hold you responsible for clearing the entire balance, and it can also ruin your credit score if you are also unable to pay.
To avoid this is to help them with enough down payment to qualify for the loan.
How to Improve Your Credit Score
Do you want to improve your credit score? Here is what you need to do:
1. Correct errors on your debts
With modern technology, errors like missing payments are usually uncommon, but they can negatively affect your credit score. However, I usually recommend you bring all your data together and check if there are any errors.
If you find any errors, the first step is to call the credit bureau directly with the evidence at hand. The bureau will investigate your claim and contact the alleged company.
If the bureau fails to correct the information, you can file a complaint with the company that sent the complaint to the bureau. Remember, you will need to have the evidence when you are filing these claims.
If the company fails to correct the information, it can be held legally liable for any financial decline.
2. Pay your bills on time
Paying your bills or debts on time can significantly improve your credit score. You can do this by signing up for automatic payments with your bank and setting up payment reminders to ensure you make timely payments.
3. Make a plan for your expenses.
Meeting your goals can be twice easier when you have the plan. One of the easiest ways to make a plan of your expenses is by creating a budget. With a budget, you can track all your income and your expenses.
A plan helps identify places you can save money and how to save more on your emergency funds.
4. do not panic
When you are planning to purchase a car, you realize your credit score is not where it needs to be. For you to get your dream car. Do not panic and start making major changes in your financial life.
Making such unintended changes to your credit card within such a short period can cause even more damage to your credit card.
The best way to solve this is to put a systematic plan to fix problems with your credit. The first step is to view the credit report and determine the easiest way to tackle those changes you'll need to make that will positively impact your score.
Does a car loan help to build credit?
Having a car loan can build your credit score in several ways, which are:
· Payment history
· Credit mix
Payment history is your full record of how you have been paying your bills. In addition, your payment history accounts for your credit score more than any other single factor. Offline, lenders report to the three nationwide credit bureaus, which help to calculate your credit score.
Lenders who offer buy and pay services here do not report this payment to the credit bureau; therefore, your payment history will not help build your credit score.
Credit mix refers to installment loans with equal payments over a specific set period, and they do not have a start or end date. For example, adding a car loan to your credit can help boost your credit score a bit.
Conclusion
If possible, wait to buy a new car until you improve your credit score to at least 730. If that is not possible for you, I would recommend you consider making a huge down payment and take the short-term loan to decrease the amount of interest you pay.
Keep in mind that it is best to shop around car dealerships and buy a car on credit discount or credit unions for the lowest rates.