Table of Contents
- Understanding Credit Scores
- Why having sufficient credit is important before applying for an auto loan
- Minimum credit score vs. ideal credit score
- Other factors your lender will consider
- How to raise your score before pursuing financing
- The Bottom Line
To qualify for auto loan financing, you’ll need to have your financial ducks in order, so to speak. That means demonstrating gainful employment and sufficient earnings as well as having acceptable credit.
One of the most crucial credit factors that will determine if you are a good borrower candidate to a lender is your FICO credit score.
What’s the lowest credit score a lender will accept? This article will guide you through everything you need to know about car loans and credit scores, including minimum vs. ideal scores, why having good credit matters, other factors your lender will consider for loan eligibility, and ways you can up your score prior to applying for a car loan.
Understanding Credit Scores
While there are other credit scoring models, including VantageScore and Equifax’s credit score, the primary credit score lenders pay attention to is the basic FICO score—created in 1989 by Fair, Isaac, and Company (today called the Fair Isaac Corporation). This three-digit score ranges from 300 to 850; the higher your score, the better your chances of getting approved for financing with better terms and lower costs.
“Your credit score is a numerical representation of your creditworthiness. It essentially reflects how likely you are to repay borrowed money,” explains personal finance pro Michael Ashley. “Lenders use these scores to assess the risk of lending to you.”
Your FICO score is influenced by five primary factors:
- Your record of past payments
- The proportion of available credit being used
- How long your credit accounts have been active
- The variety of credit types in use
- Recent credit inquiries and openings
However, it gets a bit more complicated when it comes to car loans. That’s because some car loan lenders pay closer attention to what’s called the FICO auto score, which can range from 250 to 900—a bit more expansive numerically.
But this article will henceforth refer to the basic FICO score range, as it remains the primary scoring model lenders of car loans use.
Why having sufficient credit is important before applying for an auto loan
Make no mistake: If you need financing to purchase a new or used car, your three-digit score will play a big part in whether or not you get approved for a loan.
“Having a good credit score is super important when applying for a car loan. The higher your score, the more likely you are to make your payments in full and on time and, thus, the less risky you are as a borrower,” notes attorney Ben Michael, director of Auto for Michael & Associates.
Remember: A higher score equates to paying less for the borrowed funds.
“A better score not only increases your odds of loan qualification but can save you thousands over the life of the loan in the form of a lower interest rate,” says financial expert Michael Ryan. “On the flipside, a subpar score could get your application rejected outright or stick you with a rate that will make the purchase unaffordable.”
Knowing your score before applying for a loan is smart.
“Checking it helps you understand the terms and interest rate you might qualify for and can guide your negotiations with lenders,” Geoff Cudd, consumer advocate and owner of FindTheBestCarPrice.com, says.
You can often get your FICO score for free by requesting it from your bank or credit card company (some provide your score when you log in online). You also have the option to purchase your FICO credit score through myfico.com.
Several services offer scores as part of a subscription bundle, encompassing credit monitoring, identity protection, or additional services, for a monthly charge.
Minimum credit score vs. ideal credit score
So what’s the lowest credit score you can have that will still make you eligible for a car loan? Many experts say 600.
“Typically, you need at least a score of 600 to get approved for a car loan. But ideally, you’re going to want a higher score because some lenders will require that,” Michael notes. “Those who do accept scores as low as 600 will also likely stick you with a less-than-ideal rate. I recommend aiming for at least a 670 credit score, which puts you in a better category.”
Ashley agrees.
“It’s possible to get a loan with a score below 600, but that’s the general threshold for qualifying for traditional auto financing with more reasonable rates. Falling below the score can limit your options to subprime lenders – who typically charge more, making your loan more expensive in the long run,” he cautions.
Ideally, you should have a score of 780 or better, per Ryan. Not only does a higher score improve your chances of getting approved, but “it guarantees you will receive the most competitive deals out there,” Ryan says.
Other factors your lender will consider
In addition to your credit score, lenders will also look closely at your income, employment history, down payment size, debt-to-income (DTI) ratio, and the make, model, and year of vehicle you are considering.
“Your DTI ratio is critical, as it indicates how much of your monthly income goes toward paying off debts,” Ashley points out. “A lower DTI ratio suggests you have enough income to manage additional debt – making you a safer bet for lenders.”
How to raise your score before pursuing financing
Again, it’s highly recommended to check your credit score well before applying for an auto loan. That’s because you want to ensure you have a good enough score to be eligible for financing and secure a better rate and terms.
But if your score is lower than desired, you can take action steps that should raise it, although you’ll want to postpone applying for a loan until you see that these actions have made a difference in your score.
“Improving your credit score should begin at least six months before applying for a car loan because changes in your credit report can take time to reflect,” suggests Ashley.
Here’s what the experts recommend:
- Pay your bills on time and, ideally, in full.
- Aim to reduce your credit utilization below 30%; paying down any outstanding credit card balances will help.
- Request higher credit limits on your existing credit accounts without increasing your spending, which can also help lower your credit utilization ratio.
- Avoid applying for any new credit cards, loans, or lines of credit.
- Check your three free credit reports for errors and address any you spot promptly with the three credit bureaus (Experian, TransUnion, and Equifax).
“With some diligent credit hygiene over three to six months, you could realistically increase a so-so score by 50 to 100 points or more,” Ryan says. “Having a jump like that could transform a shaky loan application into a stellar one that lenders will be eager to approve at their most competitive rates.”
The Bottom Line
Having a preferred credit score doesn’t just help with car loans – it can aid you down the road, too, when you want to apply for other loans or credit accounts, including a mortgage, home equity loan, home equity line of credit, or another credit card.
“Nurture that three-digit number, understand how it’s calculated, and make it a top priority. With some patience and good habits, you can drive away in your dream vehicle without getting taken for a ride on the financing,” says Ryan.
