Borrowing

Here's what kind of car loan you can get depending on your credit score

Twenty/20

If you're shopping for a car and plan to finance your vehicle, you'll want to consider your credit history and credit scores, which will help determine the kind of auto loan you're eligible for and what kind of loan terms you might be offered.

Your credit score is the three-digit number that tells lenders how likely it is that you'll pay back any money you borrow. It helps lenders decide whether they want to give you a loan and what kind of interest rate to offer. It's based on information in your credit report, which is a record of how you've managed your credit in the past, how much debt you carry, and whether you've made your payments on time.

Some lenders use scores that are specific to your auto history, like the FICO auto score. Your auto score takes your credit history to the next level by evaluating the likelihood you'll pay back an auto loan. About 90% of car loan lenders use FICO's auto score, credit expert Gerri Detweiler told Grow last year. FICO's auto scores range from 250 to 900, and they specifically reflect your creditworthiness for auto loans. The better your auto score, the more likely you are to get a lower interest rate on a car loan.

While you can pay to see your FICO auto score, it's not necessary: Since there are so many different scoring models, experts recommend that you check your regular credit score, which is widely available, and a good indicator of how auto lenders are likely to see you.

Before you buy, here's how you can position yourself to receive the best interest rate from an auto lender.

Review your credit history before you shop

Before you begin shopping for a new set of wheels, you'll want to check your credit score.

Some banks and credit card issuers, including Chase, Capital One, and American Express, provide customers with access to a free credit score on their monthly statements or in their account online.

If your bank or credit card issuer doesn't offer a free score, consider using a third-party scoring site like Bankrate, Credit Karma, and Credit.com, which provide free credit scores, along with a summary of your payment history, personalized tips, and financial tools.

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The higher your score, the lower your auto loan rate

Car shoppers with excellent credit and higher credit scores, whether they're looking for new or used vehicles, tend to have more financing options available to them, like longer terms and better rates from multiple lenders, Melinda Zabritski, Experian's senior director of automotive financial solutions told Grow in 2019.

"A score of 700 or higher would generally be considered a really good score and help you qualify for the most competitive offers," explains Matt Dundas, director of finance at Carvana, an online used car retailer.

It's not that you can't get approved with bad credit and a lower score. Since you may be seen higher risk, though, you probably wouldn't qualify for the best interest rate or ideal loan terms.

Let's say you do fall into the excellent, or superprime, score range of 760-850, and you take out a $20,000 auto loan with an average 60-month repayment period. Your interest rate will be about 4.4% and your monthly payment will be $372, according to FICO's loan savings calculator.

Subprime borrowers, on the other hand, and those with lower credit scores don't fare as well. Buyers with a credit score of between 500-589, for example, are looking at interest rates as high as 16.7% and a monthly car payment of $494.

With the higher credit score, you'll also save $7,312 in interest paid over the life of the loan.

Do your research

In order to make sure you're being offered a fair rate, do some research beforehand to get a rough estimate of the average car loan interest rates and the average monthly payments for your credit score based on the amount you think you'll need to borrow.

Evaluate an offer critically before taking on an auto loan, Dundas says. For instance, if you're being offered an extremely low rate, you may want to ask a few follow-up questions about a special incentive. If you're offered a 0% interest rate, for instance, he says, there's "usually there's something kind of offsetting that, where they're charging a higher price for the car or there's something else going on."

Make sure you compare financing offers from different sources. Car manufacturers tend to offer the best rates if you're buying a new car, but credit unions and small banks often offer competitive car loan interest rates as well.

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You can still get an auto loan with a score below 700

If your credit score is below 700, Dundas says you'll likely be looking at a higher interest rate and down payment for your vehicle. You may also want to be more selective about the kinds of vehicles you're considering.

"The salesperson oftentimes knows that your loan is risky, and they may try to steer you towards more expensive cars, because that way they're going to make more money on you to help potentially offset the cost that they might have to pay to have a lender do business with you," says Dundas.

To avoid paying more than you want, go in with a clear idea of your goals are for your monthly payment and interest rate. If you've done your research in advance, you'll have an idea of what's considered a reasonable payment and interest rate for your score.

The earlier you can begin preparing to buy a new vehicle and paying attention to your credit score, the better.

How to improve your credit score

If your credit score is on the lower end of the spectrum and you want to position yourself to be eligible for a better rate on an auto loan, there are steps you can take to improve it before you start car shopping.

Your payment history accounts for 35% of your credit score, so making credit card payments on time each month is critical to boosting that score. If you're able to, consider making an payment twice each month, or paying more than the minimum. Setting up automatic payments is a good way to make sure you never miss a payment.

Your utilization rate, or how much credit you're using compared to how much credit is available to you, is the second most important factor when determining your credit score. "You shouldn't use more than 30%," Matt Schulz, chief industry analyst at CompareCards told Grow in 2019. "That's when it starts impacting your credit score."

Small changes to your behavior can make a big difference to your credit score, says Ted Rossman, industry analyst at Bankrate. And, he says, "the most impactful thing that consumers can do to quickly improve their credit score is to lower their credit utilization ratio." 

That means if you have a $1,000 balance on a card with a $5,000 line of credit, your utilization rate on that card is 20%. If the total credit you have available across two credit cards is $10,000 and you have a total balance of $1,000, then your overall utilization rate is 10%. 

"Most people with the highest credit scores keep it below 10%," Rossman says. 

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