-
What Credit Score is Needed to Buy a Car These Days?
By Brandon Cornett
© 2011 All rights reservedReader question: "My credit took a hit a couple of years back, when I neglected to pay a store charge card. Now I'm in the market for a new car. What credit score is needed to buy a car these days? Is there a minimum FICO number to qualify for a car loan, or does it vary from one car dealer to the next?"
No, there is no minimum score for auto loans, and the standards vary quite a bit. So I am unable to give you an exact number, or even a range for qualification. With that being said, you'll pay a premium for having a low credit score -- in the form of higher interest.
Car Loans for Everyone?
I once read an article that said anyone could qualify for an auto loan, as long as they can afford the interest. This is a fairly accurate statement. Based on my conversations with lenders, I'd say you could buy a car with a credit score way down in the 500s. This is the textbook definition of a "bad score," by the way.
From a credit standpoint, buying a car isn't as clear-cut as purchasing a house. If you were shopping for a mortgage loan, I would say you'd probably need a score of 620 or higher. But it's different for car loans. Some auto lenders are willing to take almost anyone (though they'll charge a premium for bad-credit borrowers), while other lenders have higher standards.
This is why it's hard to say what credit score is needed to buy a car. It varies widely. Additionally, there are financing companies out there that specialize in programs for bad-credit car buyers. Do a Google search for "bad credit auto loan," and you'll see what I mean. Just be careful. You're swimming among sharks when you dip into those waters. These companies make a profit by charging exorbitant interest rates for borrowers who can't qualify for traditional financing.
The bottom line: Auto loans are fairly easy to obtain, even with credit problems. The financing company knows they can make a ton of money by charging you extra interest. So they're willing to take the risk of dealing with a bad-credit borrower. Additionally, a car is much easier to repossess than a home. Because of these things, you could qualify for a car loan with a credit score that a mortgage lender would laugh at. I just can't give you an exact number because there isn't one.
Good Credit Score = Bargaining Power
If you have a good credit score (say, 740 or higher), you should print it out and take it with you to the dealership. You can get a copy of your FICO credit score by visiting MyFICO.com. You'll pay a small price to obtain the information, but it's well worth it. You can't negotiate with a dealer until you know where you stand -- and that means finding out what your credit score is.
This will help you when negotiating the terms of the loan. Most dealers want to finance the loan themselves, in-house. Sure, they make some kind of profit on the sale of the car. But they could make even more money from the interest charged on the loan.
But you don't have to use dealer financing. If you have the kind of credit score needed to get an auto loan from some other financing company, you're in a better position to negotiate. You have other financing options available.
On the other hand, if your credit is bad, the dealer knows you don't have very many options. So you lose the ability to negotiate.
Credit Also Affects Your Insurance Costs
You may need a certain credit score when buying a car, for financing purposes. We just talked about that. But the benefits of good credit don't end there. A good FICO score can actually help you in three ways:
- It helps you qualify for an auto loan.
- It helps you negotiate a lower interest rate.
- It could lower your insurance costs.
Most car buyers are familiar with items #1 and #2 on this list. Item #3 is a lesser-known benefit. Some people don't realize the connection between credit and insurance costs. Actually, there's a strong connection. Consider the following study:
In 2011, CarInsurance.com reviewed 43,000 auto-insurance quotes provided by insurers for collision and comprehensive coverage. These were single-driver policies. They found that FICO credit scores played a major role in the cost of an insurance policy. Drivers with scores of 750 or higher saved an average of $783 per year, when compared to drivers with lower scores.
According to a June 2011 article in Time magazine ("How to Save $23,000 on Car Insurance"), the price difference can grow even wider:
- On average, a driver in the 25-to-34 age bracket pays $1,938 a year for car insurance.
- Drivers with excellent credit (FICO scores over 750) pay an average of $1,155 / year.
- Drivers with bad credit (500 - 649 on the FICO scale) pay an average of $2,023 / year.
So while it's hard to say exactly what credit score you'll need to buy a car, one thing is certain. You can save a lot of money in interest charges and auto insurance by having a good score. The higher your FICO number, the more money you could save.
Applying for a Loan
If you really want to know what credit score is needed to buy a car, you'll have to apply for financing. It's the only way to know for sure. You can apply with two or three different lenders, to see who is willing to offer you the best interest rate. If one lender turns you down because of your FICO score, you shouldn't stop there. A second lender might have more flexible criteria.
Auto lenders will generally accept a wider range of scores than mortgage lenders will. For example, you probably wouldn't qualify for a mortgage with a FICO score below 620 (not in the current economy anyway). But you could probably get a car loan at that level. In fact, you could probably buy a car with a credit score down in the 500 range. The reasons for this are fairly obvious. It's a smaller loan, and thus a smaller risk for the creditor. So they are more flexible with their criteria.
If I were you, I would check out some of the big auto-lending websites, such as DriveTime.com. According to their website, they specialize in car loans for people with bad credit. A word of caution though -- be sure to find out exactly how much the loan is going to cost you each month. Lenders charge a higher interest rate to borrowers with bad credit. So the lower your score, the higher the rate. This means a bigger monthly payment. So read all of the fine print and make sure you understand the full cost of the loan.
Disclaimer: This article attempts to answer the question: What credit score do I need to buy a car? This article is intended for a general audience. The information contained within this article may not apply to your particular situation. Lenders have their own unique standards for approving loans. The only way to know for sure if you meet their minimum guidelines is to apply for a loan. According
