When you’re in the market for a new or used vehicle, understanding the credit scores that car dealers use can be pivotal in navigating the financing process. Credit scores are a critical factor that lenders consider when deciding whether to offer you a loan and at what interest rate. For auto loans, dealers typically don’t rely on a single credit score but may use several different types, or versions, of credit scores tailored specifically for the auto lending industry. Here’s an overview of the credit scores car dealers are likely to use and how they affect your borrowing options.
FICO® Scores
The FICO® Auto Scores are among the most commonly used credit scores in the auto lending industry. FICO® has developed several versions of its credit scores specifically for auto lenders. These versions are tailored to predict the likelihood of a borrower defaulting on an auto loan more accurately than the generic FICO® Score.
The FICO® Auto Score versions can range from 250 to 900, higher than the standard FICO® Score range of 300 to 850, offering a more nuanced evaluation for auto lenders.
VantageScore
While FICO® Scores are widely used, some car dealers and lenders may also consider your VantageScore. This score was developed as a joint venture by the three major credit bureaus: Equifax, Experian, and TransUnion.
Like FICO®, VantageScore provides a credit scoring model that evaluates your creditworthiness. However, it calculates scores a bit differently and may produce a slightly different score than FICO®. The latest version of VantageScore also uses a range from 300 to 850.
Industry-Specific Scores
Both FICO® and VantageScore offer industry-specific scores. These scores are designed to predict risk for specific types of credit, including auto loans. For example, the FICO® Auto Score and the VantageScore auto score weigh your past auto loan history more heavily than other types of credit. This means that if you have a history of making timely payments on a car loan, you might have a higher industry-specific score than your general credit score.
Which Score Will Dealers Use?
The credit score that a car dealer uses can depend on several factors, including their lending partners and the specific loan products they offer. It’s not uncommon for dealers to check multiple scores to get a comprehensive view of your creditworthiness. They might also use different scores for different parts of the financing process, such as initial approval versus final loan pricing.
How to Prepare
Knowing which credit scores car dealers use can help you prepare for the financing process. Here are a few steps you can take:
Check Your Credit Reports and Scores: Before you apply for an auto loan, check your credit reports from all three major credit bureaus and obtain your FICO® Auto Scores and VantageScore to see where you stand.
Improve Your Credit Score: If your credit scores are lower than you’d like, take steps to improve them before applying for an auto loan. This could involve paying down existing debt, making all future payments on time, and correcting any errors on your credit reports.
Shop Around: Don’t just accept the first financing offer from a dealer. Check with multiple lenders, including banks, credit unions, and online lenders, to see who offers you the best rates.
Understanding the nuances of credit scores used by car dealers can empower you to better navigate the auto financing process. By knowing your credit scores in advance and working to improve them, you can position yourself to secure the best possible loan terms and rates, ultimately saving you money on your next car purchase.
The Impact of Different Credit Scores on Auto Loans
The specific credit score a dealer uses can significantly impact the terms of your auto loan, including the interest rate, loan duration, and down payment requirement. Generally, higher credit scores translate to lower interest rates and better loan terms. Conversely, if your credit score falls into a lower range, you may face higher interest rates or even struggle to secure financing.
How Dealerships Use Your Credit Score
When you apply for financing through a dealership, they will typically run a credit check to assess your creditworthiness. This process involves the dealer submitting your information to multiple lenders or through a financing network to find the best loan offer. Each of these inquiries can be based on different credit score models, depending on the lender’s preference. It’s important to note that while shopping for an auto loan, multiple inquiries within a short period (typically 14 to 45 days) are consolidated into a single inquiry on your credit report to minimize the impact on your credit score.
Negotiating Auto Loans with Your Credit Score
Armed with knowledge about your credit scores and the scores that car dealers use, you can better negotiate your auto loan terms. Understanding your credit position allows you to discuss financing options more confidently and challenge any unfavorable terms. If a dealer offers you a higher interest rate citing your credit score, ask which score they used and how it affected your loan offer. Sometimes, simply questioning the terms or showing willingness to explore other financing options can prompt the dealer to offer better terms.
Alternative Financing Options
While dealership financing can be convenient, it’s not your only option. Consider getting pre-approved for an auto loan from a bank, credit union, or online lender before visiting the dealership. Pre-approval gives you a clear idea of what you can afford and the interest rate you qualify for, which can be a powerful negotiating tool with the dealership. It also allows you to bypass the dealership’s financing altogether if you find a better rate elsewhere.
Credit Score Monitoring and Improvement
Regularly monitoring your credit score is essential, especially if you plan to apply for auto financing. Use credit monitoring services and tools offered by credit bureaus and financial websites to keep track of your score’s changes. Focus on improving your credit by paying down debts, maintaining a low credit utilization ratio, and ensuring all your payments are on time. Improving your credit score can take time, but the benefits to your auto loan terms can be significant.
Car dealers use a variety of credit scores, including FICO® Auto Scores and VantageScore, to determine your eligibility for an auto loan and the terms of that loan. By understanding these scores and how they impact your loan options, you can take proactive steps to improve your credit and secure the best possible financing. Always remember to shop around for the best auto loan rates and consider all your financing options before making a decision. With the right preparation and knowledge, you can navigate the auto financing process successfully and secure a loan that fits your budget and financial goals.
Frequently Asked Questions About Credit Scores and Car Dealers
Can I get a car loan if I have a bad credit score?
Yes, it’s possible to get a car loan with a bad credit score, but the terms might not be as favorable. Lenders may charge higher interest rates or require a larger down payment. Some dealerships specialize in bad credit or no credit financing, but it’s essential to read the terms carefully and be aware of potential high costs.
How can I find out my FICO® Auto Score?
You can obtain your FICO® Auto Scores through a few methods. Some credit card companies and banks offer free access to your FICO® Scores, including auto-specific versions, as part of their customer benefits.
Additionally, you can directly purchase your scores from the FICO® website.
Does applying for auto financing hurt my credit score?
Applying for auto financing can result in a hard inquiry on your credit report, which might temporarily lower your score by a few points. However, credit scoring models recognize rate shopping, so multiple inquiries for the same type of loan (like an auto loan) within a short period are typically combined into a single inquiry for scoring purposes.
How much can improving my credit score save on auto loans?
Improving your credit score can lead to lower interest rates, which can save you thousands of dollars over the life of your loan. The exact amount saved depends on the loan amount, term, and how much your interest rate is reduced by improving your score.
What is the minimum credit score needed to buy a car?
There is no universal minimum credit score required to buy a car since lenders have different criteria. However, borrowers with scores in the “good” range (670-739) often receive more favorable terms. Those with lower scores can still obtain financing but may face higher rates.
Should I finance a car through a dealership or get a loan elsewhere?
It depends on the financing offers available to you. Dealerships can offer convenient one-stop shopping for financing, but it’s wise to compare their offers with pre-approved loans from banks, credit unions, and online lenders. Pre-approval gives you a baseline for comparison and may offer more competitive rates.
Can I negotiate the interest rate on my car loan?
Yes, you can and should negotiate the interest rate on your car loan. Your credit score plays a significant role in the rate you’re offered, but lenders sometimes have flexibility. Demonstrating your creditworthiness or having pre-approved financing can strengthen your negotiating position.
How long does it take to improve my credit score?
The time it takes to improve your credit score can vary widely depending on your individual credit situation.
Some actions, like correcting errors on your credit report, can have a quick impact, while paying down debt and building a history of on-time payments will have a more gradual but lasting effect. Generally, several months to a year might be needed to see significant improvements.
Do car dealers prefer cash or financing?
Dealers may prefer financing because it often includes additional profit opportunities for them, such as markups on the loan interest rate or selling additional products like extended warranties. However, paying cash can sometimes give you negotiating leverage on the purchase price since it guarantees the dealer a quick and straightforward sale.
Understanding the intricacies of how credit scores influence car loans and being proactive about your credit health can significantly enhance your auto buying experience. Remember, knowledge is power, especially when negotiating financing terms for a new vehicle.
