Whether you’ve heard it once, twice, or a thousand times, the idea that your credit score affects what kind of car loan you can get is probably burned into your mind, somewhere. On the surface, it seems simple. Higher credit scores equate to better car loans, and lower ones will net you less attractive offerings.
But what are the real credit score requirements for auto loans? It turns out there are some intricate factors at play, and while the conventional wisdom generally holds true, there’s some subtlety you should be aware of, especially if you’re concerned about your current score.
Your Credit Score
Let’s get this out the way right off the bat. Your credit score is an analysis of your credit history, represented numerically, that shows your “creditworthiness.” Lenders use this score to determine how likely you are to be able to repay your debts and whether or not they will offer you a loan.
Without going too deep into the history, your credit score is based on factors like your payment history, length of credit history, how much you owe, and what kind of credit you currently hold. The number can range from 300-850, and scores above 700 are generally considered “good.”
There are several agencies that track your credit score, and if you want to see what your current credit score is, you can request a credit report at any time. Though there is sometimes a fee involved, with some services, you can get this information free of charge.
Bear in mind that your credit score isn’t the ultimate arbiter of whether or not you’ll receive a loan, and even with great credit you might still be denied for certain loan types, but it does give you a ballpark idea of where you stand at present.
How Credit Scores Affect Car Loans
We mentioned earlier that your credit score could influence whether or not lenders will be willing to take a chance on you. When it comes to car loans, it also affects the interest rates you might receive along with your loan.
When lenders give you money, they expect that you pay it back with interest, a fee levied for the use of their assets. The higher the interest rate, the more money you will have to pay back and vice- versa.
When you have good credit, usually defined as a score above 700, lenders will be more likely to offer you better interest rates (2-3% on average). With a lower score, lenders will view you as a riskier bet, and to protect their investment will attach higher interest rates to your loan, sometimes 5% or higher.
The best advice, then, is to keep your credit score high so that you have more options for obtaining better rates on your potential car loan.
Is There A Minimum Credit Score Necessary To Obtain A Loan?
Technically, no. Chances are, if you need a loan, you’ll be able to find someone willing to offer it. The thing is, though, that with a lower credit score, your options will become more limited, perhaps restricting you to loans with higher rates.
Individual lenders will set their own standards regarding what score they find acceptable to extend an offer. One might require a score of at least 640, while another might take you even if your score is 620.
As a rule of thumb, the “subprime” loan category, those with interest rates closer to 10%, is generally associated with credit scores of 600 or below.
Even if your credit is low, however, the best advice is to compare all of your options. The more you shop around, the more likely you are to find something reasonable. Keeping all possible avenues open and evaluating them thoroughly is the best way to go whenever you’re interested in purchasing a vehicle.
Image by Pixabay.com