Super-prime borrowers pay much less on a 4-year car loan than those with poor credit. But you don't actually need credit to buy a car. Read tips on how to use your car loan to build good credit and stop financing purchases altogether.
FICO scores and car loans have an inverse relationship.
Typically, if your score is low, the interest rate you're going to pay on your car loan is likely to be high.
So you pay more over the lifetime of your loan to buy the vehicle - or you may need to buy a less desirable car.
But there's more to it than just that. So read on ...
What Is A Good Credit Score To Buy A Car?
The Fair Isaac Corporation (FICO) has a handy calculator on its website.
You tell it about the loan you're interested in and it gives estimates of the interest rates, the monthly payments and the total cost of interest that borrowers with different credit scores might pay.
Suppose you select a $15,000, 48-month new auto loan. Here's what it reckoned near the end of June 2020. (Rates may change after publication.)
|FICO Score||Annual Percentage Rate (APR)||Monthly Payment||Total Interest Paid|
Notes on the FICO Table:
We had to select for nationwide figures for auto loans when we used the FICO calculator. You can get a more accurate personal picture by selecting your state and the length of the loan you want (its term). And, of course, all the figures are just averages.
So you may be able to do much better than average by rate-shopping for your best finance deal. Or you may end up worse off by not bothering to comparison-shop and by taking dealer finance when you buy a car. More on that below.
But check out the last column.
Over a four-year loan, someone with poor credit is paying $4,296 ($5,578-$1,282) more than someone with a stellar score (a "super prime" borrower).
That's more than three times as much.
Your first reaction may be surprise that things aren't worse for those with low scores. In this case, their monthly payments are only $90 higher than those for someone with awesome credit.
But imagine you're paying roughly that much more on almost everything you borrow: mortgage (or perhaps rent; most landlords do credit checks and may price accordingly), personal loans, credit cards ... pretty much everything except federal student loans.
If you think about doing that for your whole adult life, you could be hundreds of thousands of dollars down.
So what is a good credit score to buy a car?
It's the best you can make yours. If you can get yours over 720, you're laughing. But anything over 660 is OK. Below that ... well, you could profitably do some work on your score.
Do You Need Credit To Buy A Car? - Bad Credit Car Loans
You could argue that there's no such thing as a "credit score needed to buy a car" or a "minimum credit score for a car loan." Go online and you'll find plenty of ads promising no credit checks on auto loans to those with bad credit. No credit check, no "needing" a score, no minimum.
But it would be naive to think that auto lenders or dealers who offer those are doing you a favor.
They may be vague to start with about how much interest they're going to charge you. But an APR of 29.99% isn't unusual. Not so much higher interest rates as sky-high ones. And imagine the monthly car payments, even on a rusty wreck.
Still, "needs must" - there may be circumstances in which you have no choice but to pay such high interest rates.
Suppose you're currently carless, you get a job, and need a car to get you to work. Even your annoyingly judgmental brother-in-law who's a perfect money manager couldn't really blame you for making that choice.
However, you owe it to yourself to spend some time and effort working to improve your credit score. So promise yourself that the next time you change vehicles, you won't need to access car loans for bad credit. Because you won't still be a "subprime borrower" (a seriously risky one for lenders) and will at least be somewhere on that FICO table.
How To Buy A Car - The Personal Finance Phase
The key to buying a car smartly is preparation. And, ideally, you want to start months ahead of making your purchase.
To begin, check your credit reports. You are legally entitled to a free copy every year from each of the big-three credit bureaus. And you can order yours from a website owned by those bureaus: annualcreditreport.com. Don't use other sites, which may be scams or might try to charge you.
Your credit score is wholly based on the information contained in your credit reports. So any errors could be making your score lower than it should be. And a 2013 study by the Federal Trade Commission found, "one in five consumers had an error on at least one of their three credit reports," and that:
... five percent of consumers had errors on one of their three major credit reports that could lead to them paying more for products such as auto loans and insurance.
So check yours frequently - and carefully. The website of federal regulator the Consumer Financial Protection Bureau has an article, "Common errors people find on their credit report - and how to get them fixed."
Now is the time also to do a couple of other things:
- Try to build up your savings
The bigger the down payment you can make, the more you stand to save on your loan.
- Do all you can to drive your credit score higher
Even a few more points could move you into a new score range and help you save money:
How To Buy A Car - The Comparison-Shopping Phase
A week or two before you set foot on a dealer's lot, begin searching for your best auto loan deals on personal finance websites. Providing you do it over a week or two, don't worry too much about the effect on your credit score of this sort of comparison-shopping. FICO says:
Credit Scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time.
In parallel, check out what your bank or credit union will offer. And consider whether you really want a car loan or a personal loan. Each has its advantages.
Weed out the bad deals and find the one that's going to cost you least in the long run. Print out that online offer or keep a mailed one. You're going to want that in your pocket when you visit dealers.
How to Buy a Car - The Dealer Phase
Many, many car dealers are models of integrity. But they're all businesses and need to make a profit. And, unfortunately, financing makes up a big part of those profits.
So some dealers resort to bad behavior to boost their profitability. You could end up paying a higher interest rate because a salesperson lies to you about your credit score or simply thinks you won't quibble over a higher rate than the one to which you're entitled.
Don't assume your dealer is ripping you off - but be aware it might be.
How to avoid dealer scams
The worst dealers have a much wider range of scams. So it's a good idea to do a bit of online research on "car dealer scams" before you leave home.
Having that loan offer in your pocket could make a huge difference.
By all means, let the dealer come up with its own offer. Then pull out your loan offer and compare the two. You might then allow the salesperson to rerun the figures so he or she can beat your original offer. Otherwise, go with the less costly in the long run, usually the one with the lower interest rate (or APR).
But take care when comparing offers. You need to be sure you're comparing like with like, including:
- They're both loans
Leases typically have lower monthly payments because you never own the car.
- They have the same terms
A loan that lasts longer lets you spread payments, so they should be lower. But you often pay more in the end because you're borrowing for longer.
- Make sure any sales contract you sign is final
If it's contingent upon your credit being approved, you may get a call in the following days demanding a higher interest rate or bigger down payment. In the trade, this scam is called "yo-yoing."
Use Your Car Loan to Build Your Credit Score
We already provided a link to an article that could help you drive up your credit score. The fundamentals in that should apply no matter what your score is now or where you want it to end up. In other words, they apply to all credit score models.
But there's a way in which you can use your car loan to boost your score. Borrow as you normally do when you next change vehicles. But, when the loan is repaid, don't trade-in. After all, cars have a decent life expectancy nowadays, and it's not as if you're likely to suddenly be driving a wreck.
Instead, continue to make the payments as usual. But instead of sending them to your lender, transfer them into your own savings account.
Three years on and, with a $500 monthly payment, you'd have $18,000 in cash - plus the trade-in on your existing car - as a down payment on your next vehicle.
You either won't need a car loan or will require only a much smaller one.
Do the same again each time a loan expires and you may well end up paying cash for every vehicle you ever buy in the future. Imagine being forever free of monthly car payments! It's something that could easily boost your creditworthiness.
What Credit Score Is Needed to Buy a Car?
So now you know. Any credit score can buy you a car. But the implications of having a low credit score are rough for your personal finances.
Adopting a long-term approach to saving, getting out of debt, and working on your credit score can help you break the cycle of financing the things you need in life. Once you get into the process of saving instead of borrowing, you also start to build wealth so you can retire.