Ideally, you want a credit score of 650 or higher before applying for a car loan. Read on to better understand the importance of your credit score when buying a car.
Your credit score is very important when applying for any loan. Your score determines whether you are approved or not and at what interest rate. In today’s car loan market, nearly every credit score can be approved for a car loan, but people with lower credit scores are going to pay quite a bit more interest than people who have excellent credit. With average auto loans in the US now stretched out to 60+ months, differences in interest rates can have big effects on the amount of total interest paid over the life of the loan. For instance, a $20,000 at 2.0% APR for 48 months would result in $827 in total interest. For the same loan at 8.0% APR, the total interest rises to $3,400!
Auto Finance Credit Scores
Here is how it breaks down.
- 700 – 850 = Very good or excellent credit
- 680 – 699 = Good credit
- 620 – 679 = Average credit
- 580 – 619 = Low credit
- 500 – 579 = Bad credit
- 300 – 499 = Really Bad credit
Qualifying for the Prime Rate
People who have excellent credit scores will be offered the lowest possible interest rates. This is called the prime rate. Today, that rate is as low as 1.99 percent APR. If your credit score falls into the good credit category, you may be asked to pay up to 5 percent. Average credit scores may face as much as 9 percent in today’s market. If you have a low credit score or worse, you may be asked to pay 18 percent interest or higher on a used car.
Boosting Your Credit
The most effective thing you can do in the short-term to boost your credit score is pull your credit report from AnnualCreditReport.com, then check for any errors. You can then dispute these errors with the credit bureaus, often leading to an increased credit score in a relatively short amount of time. If you have really bad credit, you can look into getting a secured credit card. Making payments on one of these cash-secured cards for 6-12 months can significantly help your credit, hopefully helping you to have a better credit score when going to buy your next car.