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Owning a car can undoubtedly make traveling more convenient, but securing a car loan can be a complex process, and it can become quite expensive if you’re not well-informed. It’s essential to understand that while getting an auto loan is possible even if your credit score needs improvement, applicants with lower credit scores may not receive the same favorable terms as those with higher credit scores.
The Options: Lenders often use different credit scores to calculate the interest rates for auto loans. The two most frequently used metrics are the FICO score and VantageScore.
VantageScore: VantageScore used to have a range from 501 to 990, but now it has been adjusted to a range from 300 to 850. VantageScore employs a different set of criteria compared to FICO and evaluates various factors differently, including payment history, balances, recent credit, credit depth and usage, and available credit.
FICO Rating: FICO is the credit score most commonly used for auto loans. The FICO score ranges from 300 to 850, and it takes into account variables such as payment history, outstanding balances, average credit history, and available credit when calculating the score.
It’s important to note that insurance companies use a range of additional criteria alongside your credit score when determining premiums. They are not allowed to penalize you with higher rates, coverage denial, or policy termination based solely on a low credit score. Many insurers, including Nationwide, consider credit-based scoring to provide the most accurate assessment of a driver’s risk and, in many cases, reduce premiums for their customers.
Breaking down FICO Scores: Here’s a quick breakdown of FICO scores:
- FICO Score from 781 to 850 (Super-Prime): This category is for super-prime borrowers. If your credit falls within this range, you’ll likely qualify for the best interest rates when purchasing a new or used vehicle. You might also be eligible for rebates or 0% financing offers from specific automakers.
- FICO Score from 661 to 780 (Prime): This broader range is considered prime and typically comes with an average interest rate of around 4.9%. Improving your credit before applying for an auto loan in this range can save you thousands of dollars.
- FICO Score from 601 to 660 (Fair): Borrowers with a fair credit score fall into this category. The average interest rate is around 7.25%, and more favorable rates are somewhat more likely for those with credit scores in this range.
- FICO Score from 501 to 600 (Subprime): The subprime range extends from 500 to 600. Even though you may have additional financing options, improving your credit score before applying is highly beneficial, considering that the average rate in this range is about 10.11%.
- FICO Score 500 or below (Deep Subprime): Borrowers with credit scores below 500 fall into the deeply subprime category and are likely to pay the highest interest rates. Deep subprime vehicle loans had an average interest rate of 12.93%. With a credit score of 500, you may not even qualify for financing, depending on your income and other factors.
FICO also offers credit scoring models tailored to the auto industry, providing lenders with more precise data on your likelihood to repay a car loan on time. Any prior issues with auto loans could make it more challenging to get approved if a lender considers your automotive credit score.
What Score Do You Need? There isn’t a specific credit score required to get approved for an auto loan. Lenders consider your credit score along with other financial factors like your income when assessing your application for a vehicle loan.
While your credit score significantly influences your ability to repay debt, its impact on your auto loan may vary depending on the lender you choose and the specific credit scoring model they employ. In general, the higher your credit score, the greater your chances of securing a low-interest rate and more favorable loan terms.
However, it’s crucial to note that a credit score is just one of the aspects lenders evaluate during the auto loan process. They also take into consideration factors such as your employment history, credit history, debt-to-income ratio (DTI), and more.
Even if your credit score isn’t in the highest range, having an overall strong financial profile can improve your chances of securing a lower interest rate. The quality of your credit score affects many aspects of your financial life, from loan and mortgage applications to leasing a new apartment.
Nonprofit credit counseling organizations can be valuable resources for individuals seeking assistance in developing a strategy to improve their credit and manage their financial obligations.
Regardless of your credit position, it’s possible to secure an auto loan. However, getting an auto loan with bad credit may cost you more in interest, making it a less attractive option if you don’t specifically need a new car.
Before signing a contract with a lender, make sure you understand the terms and potential costs associated with your auto loan. You have the option to get an auto loan with any credit score, but the better your credit history, the more attractive the terms you’re likely to secure. For those seeking auto financing solutions, Philly Auto offers some of the best deals in town, regardless of your credit score.
