A good credit score means that you will have more interest rate options. If your credit score is poor, you can either seek an alternative strategy or try to improve the score first.
What Credit Score Do You Need to Buy a Car?
In general, you can acquire prime financing from banks and credit unions if you have a credit score of 650 to 660. But the lower your score, the higher the interest rate.
You will get great financing arrangements if your credit score is anywhere from 680 to 700. And with a score of 720 to 750, you can expect the lowest interest rates.
People in the subprime category (650/660 range) can end up paying double-digit interest rates.
A Good Credit Score for Buying a Car
Your credit score doesn’t just determine whether or not your loan will be approved. It affects the interest rate you will be charged.
A low credit score shows that you are likely to default the loan. So the lender will ask for a high interest rate in an attempt to offset the risk.
This applies to used cars too. You may not pay as much but the interest rate will still be way too high than you would have paid with a high credit score.
Improving Your Credit Score Before Getting a Car Loan
With a car loan, you will not have a lot of time to improve your credit score. For this reason, you need options that work almost immediately.
If you plan on buying a car sometime in the future, you have to start working on your credit score now. Here are some steps that may help:
- Start making all your payments on time and let this be a habit.
- Have erroneous negative entries removed from your report.
- Pay off loans and credit cards or pay them down.
- Pay off any past collections and due balances.
If you act soon, your credit score will improve greatly. Some of these steps require time and they will have a great positive impact.
Getting Your Loan Approved with Bad Credit
What if you need a car right now and your credit is bad?
In that case, you have six options.
- Get your regular bank to pre-approve: they will be more kind to you compared to a new lender. A preapproval will make you a stronger buyer and the dealer can even give you a better deal.
- Check different lenders: go to several lenders and try to get the best deal.
- Purchase a used car: you are more likely to get a better deal with a used car than with a new one.
- Make a large down payment: this will increase the chances of your loan being approved and you may pay a lower interest.
- Short loan term: long term loans are riskier. You will get a better deal with a short-term loan.
- Get a consigner: your co signer’s credit profile will be used to determine the rates.