What Is The Minimum Credit Score for a Car Loan?
Are you looking to purchase a car and need a loan? If so, you may be worried that your credit won’t look good to a lender and want to know more about the minimum credit score for a car loan. Don’t fret. While obtaining a car loan with just about any level of credit is possible, it may come with limitations and restrictions.
Keep reading to learn more about the minimum credit score for a car loan.
The Role of Credit and APR
While there isn’t a set minimum credit score needed for a car loan, your annual percentage rate (APR) is tied heavily to your credit history. You will need to decide if the APR your lender offers you is a rate you’re comfortable paying.
The average auto loan rate is approximately 3.9% for new cars and 8.2% for used vehicles. But these rates can be lower or considerably higher depending on your credit score.
To put it simply: the higher your credit score, the lower your interest rate. The role of a credit score is to give a lender representation of how you have historically repaid your debts. If you have a good scorecard, you can expect to be rewarded with a more competitive interest rate.
Credit Score Ranges
The two most commonly used credit scoring models are developed by FICO and VantageScore. Auto lenders usually use the FICO Score 8 model to determine your creditworthiness although the credit score models are constantly being examined to keep up to date with current trends.
While it can seem complicated, credit score tiers can be broken down into the following ranges:
- Exceptional: 800+
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor <580
If your credit score is on the low end, don’t fear! There are ways to increase your credit score ahead of your car purchase.
Tips For Improving Your Credit Score
Suppose you are a few points away from the next credit tier or want to improve your credit score to get a better APR. Try implementing a few of our tips into your financial habits.
Pay Down Credit Cards
Keeping a low balance on your revolving credit cards shows you are a responsible credit user. The ideal credit utilization rate is under 30% – although the lower, the better. If you are carrying a higher balance, try to put any extra cash toward paying down your bill and resist the urge to spend any more of the credit that frees up.
Check for Inaccuracies in Your Credit Report
Always stay up to date on your credit score by accessing the free yearly reports and keeping an eye out for any errors. If you spot an error, you can dispute it directly through the credit agency. Resolving these issues could bump up your credit score.
Keep Credit Card Accounts Open
Age of credit is a good indicator of your habits. The longer you’ve held an account, the more positive you look to lenders.
Pay More Than The Minimum Amount Due on Credit Cards
Paying more than the minimum amount due helps chip away at that balance quicker and positions you as a more trustworthy borrower.
The Cost of Obtaining a Loan
When taking out a loan for a car, your lender will lay out different term lengths. The most common terms are 24, 36, 48, 60, 72, and 84 months.
If you’re looking to keep your monthly payments low, you may opt for a longer-term length. But longer loan terms aren’t always the best option. A longer loan term means you’ll be paying more in interest over the course of your loan.
Consider this example. An individual with a credit score of 611 decides to purchase a used vehicle for $15,000. With an average APR of nearly 10%, here are some scenarios for this specific situation.
The buyer opts to put no cash down and chooses a 72-month loan term. This means a payment of approximately $280 a month with a total interest payment of about $5,000 for the loan.
Again, the buyer opts to put no cash down but goes with a 48-month term. While the monthly payment bumps up to approximately $380, the total interest paid over the life of the loan drops to about $3,200.
Note that these examples do not include warranties and other fees. The only true way to gauge how much obtaining a car loan would cost you is to talk to a lender.
Discuss Minimum Credit Score for a Car Loan With Us!
As a credit union, Members Heritage is interested in securing the very best for our members. That is why we will work with you personally rather than looking only at the minimum credit score for a car loan. With fixed rates and flexible terms, we are here for you!
While there is no minimum credit score for a car loan, educating yourself on the nuances that go into the cost to do so is an important step. Learn more about the finance charge on a car loan today.
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