By Mike Faden | American Express Credit Intel Freelance Contributor
4 Min Read | March 18, 2020 in Credit
In general, a higher credit score is likely to get you a car loan with a lower interest rate and lower monthly payment.
But you may be able to get a car loan even if you don’t have a good credit score.
In one analysis, the average credit score to buy a new car was 717; for a used car, it was 656.
If you’re looking to finance your next car purchase with an auto loan, you’re not alone. As car prices continue to rise, buyers are financing six out of every seven new passenger vehicles with a loan or lease—as well as more than half of used vehicles.1
The good news is, you may be able to get a car loan even if your credit score falls into (or even slightly below) one of the “poor” or “fair” ranges—approximately 500-600 (to learn more about the ranges, see “Credit Score Ranges: What is an Excellent, Good, or Poor Credit Score?”).
But in general, a higher credit score is likely to get you a lower interest rate—which could make a substantial difference to your monthly payments and how much you’ll pay altogether over the life of the loan. As detailed below, someone with a poor score may have to pay more than $100 extra per month, for the same car loan amount, compared to someone with an “excellent” score (above 780). That translates to more than $7,000 in additional interest charges over the life of a five-year loan.
When you apply for a car loan, the lender will check your credit history and your credit score. It’s important to note that lenders use a variety of credit scoring models, which could affect your borrowing experience. For example, if a lender relies on the FICO Auto Score, which uses a scoring model specifically designed for auto loans, any past payment issues you've had with auto loans could make it more difficult to get approved, experts say.2 On the other hand, if you’ve made on-time car payments for 10 years, that could act in your favor.
Lenders may also look at other factors, such as your monthly debt payments relative to how much you earn, and your employment history. Those factors could improve your chances of getting a lower interest rate even if you have a less-than-perfect credit score.3
And if your credit score is below average, don’t let that hold you back: People with credit scores below 600 account for more than 20% of auto loans and leases, according to Experian, although they mostly opt for used cars.4
The rising price of new and used cars is a key reason that most people finance their car purchases.
New car loans. The average sales price of a new car was over $37,500 in September 2019—and less than a fifth of U.S. households have enough ready savings to cover the full cost, according to one analysis.5,6 The average new car loan was a little over $32,000 in the second quarter of 2019. If you’re paying off that loan over five years, your credit score could significantly affect your monthly payments and how much you pay altogether over the life of the loan, as shown in the accompanying table. The average credit score of new car buyers was 717.7
Used car loans. American car buyers reportedly financed more than 55% of used vehicles in the second quarter of 2019, with loans averaging a little over $20,000. On average, people who bought used cars had lower credit scores than new-car buyers: the average credit score was 656 for all used cars, or 680 for used cars acquired from a franchised car dealer.10 The accompanying table shows how buyers’ credit scores could translate into interest rates and monthly payments for paying off the average $20,000 used-car loan over five years.
There are various ways to reduce monthly car loan payments, which may be worth exploring as costs continue to rise for both new and used cars. They include:
Build your credit score. If your credit score is less than exceptional and you can afford to wait before buying a car, you can take steps to improve your credit score, which may get you a lower interest rate. If you can’t wait, you could buy now and consider trying to refinance at a lower rate when you’ve improved your credit score, experts say.13
Make a bigger down payment. A bigger down payment reduces your loan amount, which reduces your monthly payment (assuming all other factors are equal).
Get a longer loan term. Stretching out payments over a longer period reduces your monthly cost, although it also means that you pay more in interest over the length of the loan (assuming all other factors are equal).
Shop around. You may save money by researching different lenders and getting pre-approved before you buy a car.
You may not need great credit to buy a car, but a higher credit score is likely to get you a lower interest rate. That could make a significant difference to your payments each month and how much you’ll pay for the car altogether.
1 State of the Automotive Finance Market Q2 2019, Experian
2 “What Credit Score Do I Need for an Auto Loan?,” Experian
6 “The Seven-Year Auto Loan: America’s Middle Class Can’t Afford Its Cars,” The Wall Street Journal
9 “How much will my vehicle payments be?,” Fair Isaac Corp.
10 State of the Automotive Finance Market Q2 2019, Experian.
12 “How much will my vehicle payments be?,” Fair Isaac Corp.
13 “Average Auto Loan Rates in …,” U.S. News & World Report