Applying for a car loan? Lenders will check your credit history and credit score. Before you apply, find out what credit score you need to buy a car.
Generally speaking, the higher your credit score, the more likely you are to get a car loan with a lower interest rate and lower monthly payments.
But even if your credit score isn’t great, you may be able to get a car loan.
If you’re looking to finance your next car purchase with a car loan, you’re not alone. As car prices continue to rise, buyers purchase four-fifths of new passenger vehicles and more than one-third of used vehicles with loans or leases.
What is a good credit score for buying a car?
The good news is that even if your credit score falls into (or even slightly below) one of the “poor” or “fair” ranges – around 500-600 (learn more about ranges, see “Credit Score Ranges: What Are Excellent, good, or poor credit score? ”), you may be able to get a car loan.
But generally speaking, the higher your credit score, the lower your interest rate, which can have a big impact on your monthly payments and your total payments over the life of your loan . 3As discussed below, someone with a lower credit score may pay more than $150 more per month for the same car loan amount than someone with an “excellent” credit score (780+) . 3 This equates to more than $9,000 in additional interest costs over the life of the five-year loan.
How Lenders Assess Your Credit Score When Buying a Car
When you apply for a car loan, the lender will check your credit history and credit score . 4It ’s worth noting that lenders use various credit scoring models, which may affect your lending experience . 3 For example, if a lender relies on FICO auto scores (which use a scoring model designed specifically for auto loans), any payment problems you’ve had on auto loans in the past may make it harder for you to get approved, according to Experian . 3On the other hand, if you have been paying your car loan on time for 10 years, this may work in your favor.
Lenders may also consider other factors, such as your monthly debt payments relative to your income, and your employment history . 3 These factors can improve your chances of getting a lower interest rate, even if your credit score is less than perfect . 3
How your credit score affects car loan payments
The rising prices of new and used cars is probably the main reason why most people choose to buy a car on installment plan . 2
New Car Loans. In July 2023 , the average sales price of a new car was $48,334 . 5 In the third quarter of 2023, the average loan amount for a new car was just over $40,000 . 6 Paying off this loan over five years can significantly affect your credit score, monthly payments, and the total amount you pay over the life of the loan, as shown in the attached table.
Examples of credit score ranges, interest rates and monthly payments for a $40,000 new car loan
| credit score | Average | monthly payment |
|---|---|---|
| 781+ | 5.18% | $758 |
| 661-780 | 6.40% | $781 |
| 601-660 | 8.86% | $828 |
| 501-600 | 11.53% | $880 |
| 300-500 | 14.08% | $932 |
Note: Average interest rates are based on Experian first quarter 2023 data; monthly payments are estimated using the FICO online calculator and are based on a five-year loan term . 7,8
Used car loans. U.S. car buyers are believed to have financed about 40% of used cars in 2022, with the average loan amount being just over $27,000. 6.9 The accompanying table shows how a buyer’s credit score translates into interest rates and monthly payments for an average down payment of $27,000. Five-year used car loan.
Examples of credit score ranges, interest rates and monthly payments for a $27,000 used car loan
| credit score | interest rate | monthly payment |
|---|---|---|
| 781+ | 6.79% | $532 |
| 661-780 | 8.75% | $557 |
| 601-660 | 13.28% | $618 |
| 501-600 | 18.55% | $694 |
| 300-500 | 21.32% | $735 |
Note: Average interest rates are based on Experian’s first quarter 2023 data; for example, monthly payments estimated using the FICO online calculator are based on a five-year loan term . 7,8
Strategies to Reduce Monthly Payments
With new and used car prices continuing to rise, there are several ways to reduce your monthly car loan payments that may be worth looking into. They include:
Build your credit score . If your credit score is less than stellar, and you can afford to wait before buying a car, you can take steps to improve your credit score, which could get you a lower interest rate . 10 If you can’t wait, you can buy now and consider trying to refinance at a lower interest rate once your credit score improves . 11
Make a bigger down payment. Making a larger down payment reduces the loan amount and therefore lowers your monthly payments (assuming all other factors are equal) . 12
Extend the loan term. Extending your repayment term can lower your monthly costs, but it also means you’ll pay more interest over the life of the loan (assuming all other factors are equal) . 13
Shop around. You can save money by researching different lenders and getting pre-approved before buying a car . 14
You may not need great credit to buy a car, but a higher credit score may get you a lower interest rate. This can have a significant impact on your monthly payments and the total amount you’ll pay for the car.
- “Consumer and Community Context,” Federal Reserve
- “Can you buy a car with a personal loan?” Experian
- “What is a Credit Score?” Consumer Financial Protection Bureau
- “What credit score do I need to get a car loan?” Experian
- “Average new car prices increase at smallest pace in decade”, Kelley Blue Book
- “Auto finance markets show signs of optimism in Q3 2023”, Experian
- “What car loan rates are reasonable?” Experian
- “How much will my car loan cost?” MyFICO
- “Average auto loan balances to grow 7.7% in 2022”, Experian
- “How will buying a car affect your credit?” Experian
- “What interest rate can you get on a car loan based on your credit score?” Experian
- “Will your down payment affect your monthly loan payments?” Experian
- “Short-term vs. long-term car loans: What you need to know,” Experian
- “How to Get Approved for a Car Loan”, Experian
Mike Faden has been covering business and technology issues for more than 30 years as a writer, consultant, and analyst for media brands, market research firms, startups, and established enterprises.
All Credit Intel content is written by freelance writers and commissioned and paid for by American Express.
