The Impact Of Credit Scores On Car Loans
According to Experian, around 38.3% of the issued loans in 2018 were provided to borrowers having a credit score of 660 or lower. The average score for getting a new car loan is around 717. For a used car, it’s around 661. Therefore, you might qualify for a loan with a reduced credit standing but only with a limited amount of lenders.
Getting back to the report from Experian, the borrowers with a credit standing of 660 or less were granted car loans with an interest rate that ranged from 7.52% - 14.41% for new cars. For used cars, the range was from 10.34% - 18.98%. If you have a lower credit standing then the rate of interest is surely going to be higher.
Types of Credit Scoring Models Used by Auto Lenders
Here are the top three credit scoring models that are widely used by auto lenders.
- FICO 8 and 9: In the latest versions from FICO, both models are quite effective in calculating the basic score. These models help with the basics of your overall solvency. Borrowers can also get access to either of the scores with their credit monitoring service or credit card issuer
- FICO auto scores: Along with FICO 8 and 9, FICO also helps with a specific credit report model dedicated to the auto industry, FICO Auto Scores. The model provides particular information on the payback possibilities of the lender. Upon using this model, any issues regarding past payments can also be tracked
- VantageScore 3.0 or 4.0: These models are used by the three most popular credit reporting agencies. These agencies include TransUnion, Equifax, and Experian. The models are slightly different from the FICO models. However, they provide similar details regarding your creditworthiness
How Much Credit Score Is Required For A Car Loan?
The score required for a car loan can vary according to the car type. For the borrowers with a credit standing lower than 700, the minimum interest rate for used cars is 6.5%. For new cars, it’s 17% or more.
Here’s a chart that’ll help you determine the credit score required for a car loan.
Average APR for New Car
Average APR for Used Car
Non Prime: 601-660
Deep Subprime: 300-500
Ways To Improve Your Credit Score
Here are some steps that could help in improving your creditworthiness:
- If possible, wait before looking for a car loan. This will help you to save some money
- Make your bill payments on time and don’t miss any payments regarding your current loans
- Pay an acceptable amount for a down payment. This helps in reducing the interest as well as the amount to be borrowed
- After making any purchase, keep working on your credit report. This helps in refinancing your auto loan with a reduced rate of interest
- Look for a family member or friend with a high credit score and appoint him as a co-signer to get the loan approved. After improving your creditworthiness, you can also remove the co-signer from the loan and refinance it
Your credit score helps increase the chances of your loan getting approved. If you have a poor credit standing, it’s better to wait and improve your score rather than pay high-interest rates. If you have a low score but still need financing, you may want to consider subprime lenders. However, keep in mind that this may lead to inflated interest rates.