A very common question we see is what is a good credit score to buy a car?
If you are paying 100% in cash, you could have the lowest credit score in the world, and buy any automobile you wanted. Salespeople will beat a path to your door. You meet the requirements!
The rest of us need a minimum credit score that is good enough to qualify for automotive financing (loans or leasing) – at an amount that we can afford.
Arriving at the appropriate monthly payment that qualifies you for an approval is the important part. Your interest rate, the price of the vehicle, the term of the contract, loans versus leases, new versus used, money down, and cosigners all factor into the equation.
What is a Good Credit Score for a Car Loan?
The first question to address is what is a good credit score to buy a car with a loan? With a loan, you purchase the right to drive the automobile out of the dealer showroom. However, you did not own the vehicle until you complete making all the payments, and the lender turns over the title to you.
A better question to ask is how your credit score, monthly income, and existing obligations influence the price of the auto you can afford to buy on finance. Your ratings determine the interest rate, which factors into the monthly payment you can afford.
Credit Score & Interest Rate
The interest rate charged is one of three variables determining your monthly payment. Once you know the APR you must pay, you are ready to begin identifying an affordable amount.
Your FICO score determines the annual interest rate (APR) that the auto lender will charge on the car you want to buy. Lenders charge more to risky borrowers to offset default risks. The lower your rating, the higher your APR will be.
|Better||700 – 749||7.5%|
|Good||650 – 699||12.0%|
|Poor||550 – 649||17.5%|
Credit Report & Score
View a copy of your consumer report to determine whether your rating and debt burden are good enough to qualify for a car loan – at the price point that you are considering. Lenders will use your rating to determine your interest rate. They will also pull your existing monthly obligations from the other accounts appearing on your consumer report in order to calculate your debt burden.
Your credit score and debt burden will determine the price of the vehicle the lender will approve. Therefore, you need to know where you stand on both factors before walking into the dealership. The projected monthly payment, the amount of money down, and use of a co-signer will also play a role in what the lender will consider acceptable for an approval.
Monthly Payment Amount
The lowest FICO score needed to obtain a car loan approval keeps your monthly payment below two key thresholds. Auto lenders often calculate two debt-to-income (DTI) ratios to verify that you have sufficient income to pay them back according to terms, throughout the length of the contract.
- Back-end debt-to-income ratio: your total monthly payments for all obligations should not exceed 40% of your gross monthly income.
- Front-end debt-to-income ratio: your monthly principal, interest, and auto insurance obligation should not exceed 15% of your gross monthly income.
Credit scores influence interest rates – which determine borrowing costs. For example, this chart shows how the monthly payment and DTI correspond to rating ranges for a sample applicant. The principal amount borrowed is $20,000 and the monthly income is $3,333 or $40,000 annually.
Get an auto insurance quote to help determine this element in your monthly payment amount. The term of the loan and the vehicle price are also key inputs.
The sticker price of the car is the second input to the monthly payment. The amount you pay each period for a $60,000 German luxury sedan will be three times higher than for a Japanese or Korean economy model for under $20,000.
Term of Loan
The length of term of your auto loan is the third input to the monthly payment. The principal only amounts are lower for longer terms, and vice versa. Consider this $20,000 principal only example.
|Repayment Term||Periodic Amount|
Zero Percent Interest
There is no specific credit score necessary to buy a car with zero percent financing, although higher is always preferred. Qualifying for a zero-percent interest rate loan has more to do with the timing of manufacturer incentives.
Banks such as Capital One or Wells Fargo do not lend money without charging interest to offset the time value of money and the default risk. The same holds true for credit unions such as Navy Federal Credit Union, and others.
Automotive manufacturers such as BMW, Chrysler, GMC, Ford, Honda, and Toyota offer zero percent loans through dealerships as incentives to clear inventory. This happens frequently at the end of model years. People think they are getting a deal.
No Money Down
A higher credit score is necessary when buying a car with no money down. A loan with a 100% loan to value ratio raises risks to lenders. It also increases the principal amount. Therefore, they will require better qualifications, or charge higher interest rates.
Banks want borrowers to have skin in the game, and demonstrate the ability to stay current throughout the contract term. An owner with no money down has less to lose in the event of repossession. Someone without the resources to fund a down payment is also more likely to encounter trouble staying current.
A higher credit score is preferred when buying a car without a cosigner. A loan with only one responsible party is riskier for finance companies. Therefore, they will charge higher interest rates, or employ stricter underwriting criteria.
Loans without a cosigner are more likely to default. If that one person were to encounter financial difficulty, no second person would be obligated to assume making payments to keep the contract current.
What is Good Credit Score to Lease a Car?
The second question to address is what is a good credit score to lease a car? With a lease, you purchase the right to drive the automobile for a specified length of time, and a designated number of miles. You will never own the vehicle unless you change the terms of the contract.
Banks will allow a lower credit score when leasing a new car because the monthly payments are typically smaller. You are not spreading the entire automobile cost over the term of the contract. Instead, you are paying for the portion of the vehicle’s useful life that you consume. The automobile has a residual value when you return it at the end of the lease term.
Because you are financing a much smaller percentage of the total vehicle price, applicants with no credit history or an adverse credit history find leasing the better alternative.
Leasing a car with no credit history is possible if you can demonstrate sufficient income, a strong work history, and that you are not an impostor.
- Print tax returns for the last two years a copy three months of paystubs to document income.
- Prepare your employer to expect a call from the lender to validate your income and employment.
- Bring your driver’s license, passport, and other official government-issued documents that certify that you are a real person, living at a real address.
Expect to pay a higher lease money factor (interest rate) if you have no credit history. While no history sounds neutral, it is actually a big negative. People without information appearing on their consumer report are more likely to be faking a persona.
Leasing a car with bad credit or a negative history such as a chapter 7 or 13 bankruptcy is more difficult. You must find a way to counterbalance the negative information and make your application more acceptable. Expect the leasing company to require several offsets.
- A lower debt-to-income ratio
- Longer work history
- More money down
Minimum Credit Score Needed to Buy a New or Used Car
The third question to answer is what minimum credit score is good enough to purchase a new versus a used car? Yes, you may find very different financing alternatives if you buy something brand new or simply “pre-owned.”
Think about the pros and cons of new versus used before completing the paperwork.
The minimum credit score required to buy a new car could be higher than average – because you probably are spending more money. New autos have a higher sticker price. You pay a premium to be the first and only person to drive the motor vehicle.
When you spend more money, you push up the debt-to-income ratio.
The minimum credit score needed to buy a used car could be higher than average – because lenders face greater uncertainty. They find it more difficult to predict the future value of your collateral, and it is more expensive to maintain the vehicle properly.
The place of purchase also affects requirements.
Buying from Dealers
Used car dealers such often provide programs that verify the value of the collateral and reduce surprise repair expenses. Many manufacturers provide certified pre-owned programs. The used motor vehicle dealer (Carmax and others) performs a series of inspections and repairs and may include extended warranties along with roadside assistance.
Banks often require the highest credit scores when buying a used car from a private owner. Somebody selling via classified advertisements or other means often cannot provide a reliable certification program. They often have no existing business relationship with financing companies. This raises risks quite a bit.
Unsecured personal loans sometimes work better for transactions with private owners.
Most private owners do not participate in manufacturers pre-owned certification programs. They often cannot verify that the jalopy is defect free. They also cannot protect drivers from future repair costs with extended warranties and roadside assistance programs. However, you may be able to negotiate a lower price.