Having a high credit score is no longer necessary to be approved for a loan. Today, credit scores are only used to determine the amount of credit that you can receive, and not the approval process itself. It is now possible to get a car loan with a credit score as low as 500, and this is only possible if you are using a secured loan.
When you apply for a car loan, lenders look at many factors, including your credit score and payment history, to determine how much risk they’re taking by giving you that loan.
The higher risk they perceive you to be, the more likely they set your interest rate higher as compensation for the risk they see in lending to you.
In This Article
What does a credit score mean?
A credit score is just one piece of information that lenders use to determine your ability to repay a loan.
Even if you have an excellent score, not all lenders will offer you as low-interest rates as someone with an above-average or even average rating. Lenders also take into account whether or not you own real estate and how long your job has been stable.
The longer your credit history at one place, and in one line of work, generally means a better risk profile to lenders; they figure if you’ve stayed in business in tough times before, chances are better that they’ll be paid back on time by paying customers like yourself.
How to check your credit score
Your credit score is based on 5 main areas: the amount of debt, payment history, length of time in use, types of accounts, and new applications for accounts.
The lower your credit scores are in any one of these categories (except for the length of time in use), your overall scores will be lower too.
You can check your scores with sites like CreditKarma or MyFico to get an idea of what they are so far (and check them periodically throughout any changes that you’re making). If you want to know exactly what’s driving your score and why requesting an official copy from Experian or TransUnion is helpful to put all the pieces together—that’s called getting your credit report.
Is a 475 credit score good for a car loan?
A bad credit score doesn’t necessarily mean no loans. As long as your income and assets are high enough to make monthly payments, lenders should be willing to work with you – and help guide you along your path toward fixing up your poor credit rating.
Also, whether or not your 475-credit score is sufficient will depend on what type of loan you’re getting: auto or mortgage loans are very different in terms of affordability requirements, so don’t assume that just because one will approve you that they both will.
What is the lowest credit score to buy a car?
There is no magic number to guarantee acceptance for any auto loan, but most lenders require at least a 620 credit score.
The interest rate offered is determined by multiple factors including your income, current debt-to-income ratio, and length of history with your existing lender (if applicable).
In addition to submitting pay stubs or bank statements showing continued employment, another way to establish credibility with your application is if you provide proof of employment (3 months) through tax documents such as W2s or 1099s.
Auto loans are generally considered unsecured meaning they do not require collateral like traditional mortgages or home equity lines of credit.
What score do car dealerships use?
It’s important to understand that each dealership has its requirements, meaning your car-buying experience could be very different at one place than another, depending on whether you’re dealing with banks or lenders, private or public auctions, and even state laws.
For example, in Washington, dealers can require a minimum FICO score of 680 to buy from them (though there is no legal cap), while some private sellers have been known to demand FICOs of up to 850 — extremely high scores.
Additionally, many lenders have minimum purchase requirements for certain types of loans; if your credit score doesn’t meet those standards when applying for financing (typically as part of an auto dealer’s package), then they’ll say no deal!
How high does my credit score need to be for a car?
Most people will qualify for an auto loan with excellent (720+) or even very good (700+) credit scores, but what is your specific number, and will that be enough to get financing? Different lenders have different standards, but most don’t require a perfect FICO score.
You’ll likely be required to have fewer consumer debt accounts, like credit cards or department store cards, open when compared to those with lower scores to qualify for your desired interest rate (higher rates are reserved for those with lower scores).
If you need more information about how to improve your chances of getting approved by a bank or other lender, check out our guide on how to rebuild bad credit.
Why do banks look at more than just your FICO Score when deciding whether or not to lend you money?
Banks aren’t just looking at your credit score when deciding whether or not to lend you money. They have their internal scoring system, designed with much more nuance than your FICO Score.
The problem is that they’re usually not allowed to show you theirs, because of privacy and business competition laws. As a result, most banks use FICO Scores as a quick way to tell if you might be trustworthy—without having to review thousands of points of data—and then dig deeper only if they find something suspicious in your background check report.
Do different types of loans use different formulas to calculate an applicant’s risk?
No, credit scores are used across all types of loans. For example, credit scores are used to calculate your FICO® Score from Fair Isaac Corporation which is calculated based on information in your Equifax®, Experian®, and TransUnion® credit reports. FICO® Scores are widely accepted by lenders as one measure of your credit risk (risk of default).
The Fair Isaac Corporation doesn’t publicly disclose its proprietary formula, but studies show that there’s a strong correlation between higher FICO® Scores and lower default rates for auto loans.
An excellent score can go above 800, while even those with poor or average scores can qualify for auto financing in most cases if they meet other basic criteria such as income, residence status, and length of employment history.