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What Credit Score You Need For A Car Loan

December 9, 2020 | Vehicle Financing

When you set out to buy a car, one of the most important factors in how much car you can afford is your credit score. Your credit score can dictate the amount of the loan you can secure and at what annual percentage rate (APR). We’ve created a guide to walk you through what type of car loans might be available to you, depending on your credit score.

How Credit Score Is Defined

Your credit score is a numerical description of how trustworthy you are as a borrower. It’s a number that falls between 300-850, with 850 being the best possible score you can get. FICO, the Fair Isaac Corporation, created the credit score system. Your credit score is defined based on a combination of how many accounts you have open, how much debt you have, and how well you’ve repaid the debt in the past.

Your credit score is calculated by the following:

  • 35% is comprised of your past payment history
  • 30% is the amount of credit available to you that you are using
  • 15% is the length of your history accounts
  • 10% reflects the type of credit you have used
  • 10% is calculated based on your number of new accounts and credit inquiries

According to FICO, a credit score above 800 is excellent, while a credit score in the range of 670-799 is good or very good. If your score falls below 670 it will be considered fair, and below 580 is considered poor. Different lenders might consider different ranges to be excellent, fair, and poor.

Your credit score can dictate a great deal about your financial life: how much of a loan you can be approved for, the amount you will have to put down as a deposit for a car, phone, or house, and whether or not you will be approved for a credit card.

Ideal Credit Scores For Car Loans

U.S. News published a report in September of 2020 listing the average APR that each category of credit holders has obtained:

  • 750+, excellent credit: 5.07% for a new car, 5.32% for a used car
  • 700-749, good credit: 6.02% for a new car, 6.27% for a used car
  • 600-699, fair credit: 11.40% for a new car, 11.65% for a used car
  • 451-599: poor credit: 16.46% for a new car, 16.71% for a used car

As you can see, having excellent credit can save you up to 10% on your APR for a car loan. If you have a credit score below 450, it’s possible that you will not be able to get approved for a car loan at all.

If you want to know exactly what loan you can get approved for, a great idea is to get pre-approved. Almost all lenders offer this option. You provide all the documents to the lender that would be needed to obtain the loan. The lender then processes your application, issuing you paperwork that ensures that you can obtain that particular loan at that particular APR. This can help you as you head to the dealer as, oftentimes, the loans and financing options that the dealers will offer you are worse than the deals you can get by shopping around.

Keep in mind that those listed rates are just averages. You could be surprised by what you find when you apply for pre-approval. Some institutions offer excellent rates lower than the listed averages.

How Getting A Car Loan Affects Your Credit Score

When you initially take out a car loan, your debt will go up. This might cause a temporary decrease in your credit score. However, as you make your payments on time, you will improve your credit score over time.

As discussed above, 35% of your credit score is influenced by your payment history. Thus, every time you pay your car loan on time, you are adding to your repayment history, showing future lenders that you are a trustworthy consumer.

Improving Your Credit Score For A Car Loan

Improving your credit score, even by just 10 or 15 points if you are on the margin of credit categories, can seriously improve your access to good APRs.

As you can see by the breakdown of your credit score, repaying your debt on time is the best way to improve your credit score. Endeavoring to make every payment you owe on time (whether it is a loan, credit card, or rent payment) can contribute positively toward your credit score.

In addition, when you do decide to take out a car loan, this is an opportunity to improve your credit history. However, it’s important to know how much car you can afford before you head to the dealership. Otherwise, you could end up with a monthly car payment that is out of your budget, leading to damage to your credit score if you can’t make the monthly payments.

Check out our blog post on how to set a budget for your new car to help you make sure that your new car loan will add to your credit history rather than take away from it.

How Much You Should Spend on a Car

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