A widespread question we see is what is a good credit score to buy a car on finance?
If you are paying 100% in cash, you could have the lowest credit score in the world, and purchase any automobile you wanted. You meet the requirements!
However, the rest of the world needs a minimum credit score that is good enough to qualify for an auto loan. Besides, your debt-to-income ratio, down payment amount, possible cosigner, and employment history enter the equation.
Lenders consider all of these factors when deciding whether to approve an application, the interest rates to charge (zero or much higher), and the length of the contract.
Credit Score Needed to Buy a Car
The credit score needed to buy a car by taking out an auto loan is different for every driver, dealer, bank, and finance company. An automotive credit score (FICO and Vantage) predicts the likeliness of future delinquency based on historical information in your consumer report. However, the rating is not the only underwriting tool that a lender might use to make a decision.
- Debt-to-Income ratio (DTI) helps underwriters assess whether the payments are affordable
- Employment and income verifications assure analysts that earnings will continue
- The down payment percentage creates a reason not to abandon the contract
- A cosigner is a second person that steps in to make payment when you cannot
First, each lender (dealership, bank, or finance company) employs its own qualifying rules. Also, each applicant comes to the table with a different DTI, employment history, down payment size, and possible cosigner.
Without a Cosigner
A higher credit score is needed when buying a car without a cosigner. A loan with only one responsible party is riskier for finance companies. If that one person were to encounter financial difficulty, no second person would be obligated to assume making payments to keep the contract current.
Therefore, auto lenders will charge higher interest rates, or employ stricter underwriting criteria when reviewing car loans without a cosigner.
- Approval odds will be lower given the credit score and debt-to-income ratio
- Interest rates will be higher to reflect the greater default risks
For example, an applicant with a credit score of 650 might be OK with a second person securing the contract but could need a higher rating of 700 without a cosigner – ignoring the DTI and down payment size for the sake of illustration.
With 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 (LTV) raises risks to lenders. Therefore, lenders will require better qualifications before approving borrowers.
- Zero money down means the borrower has no skin in the game. It becomes far too easy to walk away from the obligation if you run into financial difficulties later on.
- People who lack the resources to make an initial deposit show they are living on the edge. A surprise repair expense or other emergency need could quickly lead to late payments and default.
- Zero money down means the original principal amount will be larger. Borrowing more translates into higher monthly payments, which are more difficult to afford at any given income level.
Again as an example, a driver with a rating of 650 might qualify with 20% down, but then need a higher credit score of 700 with no money down – holding the cosigner and DTI elements constant for the sake of illustration.
Credit Score for Zero Percent Interest
There is no specific credit score necessary to buy a car with zero percent interest. Cash buyers never pay a dime in interest and are true owners who walk out of the dealership with possession of the vehicle title. Any rating will do because cash buyers are not using a lender’s money.
However, most people do not have $20,000 to $35,000 in cash in a savings account and need to borrow money to “buy a car.” The auto finance company owns and holds the title while the driver uses their money to operate the vehicle. Plus, lenders always charge something for this privilege.
The lucky few who qualify for zero percent interest rates have better than average qualifications and can take advantage of financing deals designed by manufacturers to move inventory.
Automotive manufacturers such as BMW, Chrysler, GMC, Ford, Honda, and Toyota offer zero percent financing deals through dealerships as incentives to clear inventory. Most often, the companies offer these bargains at the end of model years and other times when they want to boost sales totals.
However, 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 for credit unions such as Navy Federal Credit Union, and others.
Therefore, the trick to qualify for a zero percent auto financing deal is part timing and luck, and having a good credit score, down payment, DTI, and income verification.
Rate by Score
A table of the average car loan interest rate by credit score can give you a sense for whether you might qualify for a zero percent interest rate when offered. The manufacturers might offer financing deals that shave a few points across all ranges (keeping in mind DTI, down payment, employment history).
For example, if the manufacturer offers financing deals shaving off 3.5% for all borrowers, only the drivers with an automotive credit score of 750+ would qualify for the zero percent arrangement. Also, applicants with ratings in the 700 to 749 range might pay 4.0% instead of 7.5%, and so on.
|Better||700 – 749||7.5%|
|Good||650 – 699||12.0%|
|Poor||550 – 649||17.5%|