Shopping for a car with bad credit is not going to be easy since your credit score has a lot to do with getting approved for a car loan. Even if you have not accumulated any more debt over the years, bring in a decent income, and have established a stable job history, car dealerships and auto loan lenders are hesitant to work with you.
While credit scores under 650 prompt lenders to charge higher interest rates, you can get approved for a car loan with a fair APR if you do your research. Learning about auto rates for buyers with fair to bad credit and taking steps to raise your credit score will keep you from buying a car you cannot afford in the long run.
Good Car Loan Credit Scores For New And Used Cars
The problem with credit scores is that they vary according to the credit agency. The three national credit bureaus (Equifax, Experian, and TransUnion) all post different scores for the same individual. Each agency gathers unique information on every consumer and has its own way of computing data that has not been collected by the other two bureaus. For instance, a car buyer who requests a free credit report will see a Transunion score of 540, an Experian score of 525, and an Equifax score of 500. It is important to check your credit report before you visit car dealerships and fill out loan applications, but it is also important to know what credit score car lenders will base their decisions on.
Knowing Your FICO Score
Car loan applicants should also know their FICO and VantageScore numbers since auto lenders commonly use these credit scores to determine creditworthiness. Both agencies use a range of 300-850 to rate consumers’ credit scores. FICO and VantageScore numbers are similar, but more accurate, to those posted by the national credit agencies. So, it is imperative that you ask the auto lenders looking over your car loan application to pull your FICO and VantageScore. Generally speaking, car shoppers with a credit score of 725 and above will receive the best APRs. People with scores between 625 and 725 will receive fair interest rates, and car seekers with scores below 600 will be charged the highest interest rates. These credit score requirements are standard no matter if you are in the market for a new or used car because for auto loan lenders, the risk is the same. Therefore, it is important to know the industry jargon lenders use to describe your credit score rating:
- Super-prime borrowers: 750 and above
- Prime borrowers: 685- 750
- Nonprime borrowers: 620 -685
- Subprime borrowers: 500 -620
- Deep subprime borrower: 300- 500
Car loan lenders generally agree that a score of 650 is the number that distinguishes borrowers at a greater risk for defaulting on their auto loans. If you do not need a car right away and your current score is not at the customary mark, you should aim to raise your score to 650 or above to qualify for the best car loan rates.
Auto Loan Rates for New & Used Cars
The direct link between your credit score and the APR of your car loan is that when the score is low, the interest rate and monthly car note are high. When you are ready to start car hunting, begin to shop around by calling lenders and inquiring about current interest rates for your credit score. Although these are just simple quotes and based on general information, you can compare the scores from multiple car loan companies to determine what you qualify for. These estimates are general and given for comparison purposes only. You should also check online for the latest auto loan rates. Here are the average new car loan rates based on credit score:
- Super-prime: 2.6%
- Prime: 3.6%
- Nonprime: 6.4%
- Subprime: 10.6%
- Deep subprime: 13.5%
Average Used Car Loan Rates Based Credit Score
- Super-prime: 3.4%
- Prime: 5.1%
- Nonprime: 9.5%
- Subprime: 15.7%
- Deep subprime: 18.9%
Note: These scores are based on Bankrate Financial Services auto loan quarterly reports.
What Is A Good Car Loan Credit Score?
A good car loan credit score is an important element to take into consideration when buying a car. What constitutes as a score varies from one person to another depending on their financial track record. In general, an excellent score is a score between 740 and 850, a good score is from 680 to 739 and the sub-prime score is anything below 680. With that being said, financial lenders look into your credit score and make the decision of whether or not to offer the loan. This will tell them the likelihood of whether you are able to repay the loan in the future. What kind of dealerships will approve bad credit? Almost all. To get approved instantly, your score should be anything above 740. An average score may qualify you for the loan but that loan will come with higher interest rates and stringent clauses.
Auto Loan Rates For New And Used Cars
Any lender lending money to someone buying a car will stick to their own rates and regulations. On average, this rate will be around 3.2% for an excellent credit score, 4.5% for good score and 6.5% to 13% for a score that is considered below average or bad. What kind of dealerships will approve bad credit depends on who you talk to. The best rate for your situation will depend on multiple factors, including but not limited to wages, priorities, affordability and so on. Nevertheless, your aim is to obtain the best competitive rate from available lenders with the lowest monthly payment. To achieve this, you may be required to decide on whether you want to sign up fora long-term loan or short-term loan. A longer-term loan is the most popular way because it carries a lower interest rate, and repayment is manageable for someone with an average or bad credit score. The loan is stretched over 60 months period. There are many studies on car loans, available rate, consumer preference or what kind of dealerships will approve bad credit, conducted by a few survey companies.
Steps To Getting A Car Loan With Bad Credit
Knowing what to expect – As a loan borrower for your car purchase, it greatly helps to learn that the lender is mostly going to charge a higher interest rate for those with bad credit and lower interest rate for good and excellent score. This is why you need to be a savvy shopper and enhance your prospects of getting a good deal for your financial situation. After all, it never hurts to shop, and it’s free.
Checking your credit score- However, shopping for the best rate will not bring to you the lender of your dreams. You need to make sure that your credit score is up-to-date and where you stand in the financial world. So, get a credit report from the official credit bureau and check for errors or inaccuracies if any. These reports come free of cost and are mailed to you within a week of applying. Sometimes, the report can be obtained instantly through email.
Working out on your affordability- One interest rate cannot fit all. Your rate depends on multiple factors as mentioned above. But you are not alone, because many lenders are eager to work with their customers on providing the best rate and devising the best repayment plan. How much you can afford can also be calculated using software tools on the internet, check them out as early as possible.
Finding a suitable lender- Just like not all cars are made for you, not all lenders will be favorable in your position. To the question, “What do I need to prepare when applying for a car loan with the best credit”, the answer is, very little, because most lenders lean towards people with excellent credit score. However, that doesn’t mean you will never get a loan with bad credit. Certain banks, credit unions, and big finance companies don’t mind taking a risk on consumers with bad credit. If you happen to be lucky with one of these lenders, go for it without a second thought. Again, be prepared with what to expect from the lender.
Shopping around pays off- Who doesn’t love to shop when there are thousands of car models to choose from? Here, shopping means choosing the lender for your car loan. This may not be as pleasant as test driving the latest car model, but it’ll pay off in the long run. You are shopping for the best interest rate with the flexible repayment plan and the lender who will work with you when things don’t go as expected. The whole process of shopping needs to be done within a month, otherwise, you will be ruining your credit by exposing your credit history to many lenders.
Getting Pre-Approved- Still wondering, “What do I need to prepare when applying for a car loan”? Between shopping for the right kind of vehicle and signing those loan documents, there is a lot you can do to prepare yourself. For example, you can get yourself pre-approved from a lender and acknowledge it to other lenders. This way you are not only setting yourself up for the best kind of deal but preventing your credit score from harm.