Have you ever wondered what credit rating you would need for a car loan? Most people do. Most people don’t have the amount just lying around to go and buy a car directly. A statistic from 2019 shows that more than 113 million Americans have auto loans. This number increases steadily over time. Having a higher credit score will definitely bring you some benefits, but you can even get your wish with a lower credit score.
You could also be someone who wants an auto loan but you are unsure of the score and the interest rate you would have to pay. Read on to find out what you need to pack that all-new Volvo XC60, BMW X5, or Mercedes-Benz GLC 600.
What is a credit score and what do the values ââmean?
A credit score is a measure of a person’s creditworthiness. In simpler terms, this is a number that represents a person’s ability to pay off debts on time. If a person is on time and pays all of their debts and loans on time, they are said to have a good credit rating. The reverse is also true and leads to a bad credit rating.
It is measured on various factors, such as a person’s repayment history, credit records across loans, and lending institutions. The number ranges from 300 to 850. The higher the number, the better and the more benefits you will receive. It basically lets a lender know that you will pay off your debt on time.
Here are some of the scores and what they mean:
Deep subprime: 300-500 (considered poor)
Subprime: 501-600 (considered fair)
Not first: 601-660 (considered good)
First: 661-780 (considered very good)
Superprime: 781-850 (considered excellent)
How Much Credit Score Do You Need to Get a Car Loan?
Well if you want a car you have to have a pretty solid credit rating. Credit scores usually also reflect the amount of interest you would have to pay. The higher your credit score, the lower the interest.
You must have a credit score of at least 660 and above to get a car loan with an interest rate of around 6%. It also varies depending on the purchase of a used car or a new car. A used car loan will require an average credit score of 657, while a new car loan would be above 721.
However, if your credit score is lower than that, don’t worry. One statistic showed that about 30% of auto loans were taken out by people with a credit score below 600. Also, 4.5% of those people had a credit score below 500. It’s just that you would have to pay more interest.
Credit score and how it relates to auto loan rates
You will want to have your credit score checked before purchasing a car, as this will cause a difference in loan rates. Some lenders may also present you with car specific credit scores that would only show the credit score related to auto loans.
As you have more credit score, the amount of interest that you would have to pay is also greatly reduced. For example, if you buy a used car and your credit score is over 700, you will find rates of around 6.05%; but someone with a score lower than 500 should pay 17.78%.
On a five-year loan for the principal of $ 20,000; the monthly interest would be $ 387 for the one with a better credit score and $ 505 for the one with a lower credit score. Here is a table to better visualize it:
|Credit score||Average APR for new cars (in percentage)||Average APR for used cars (in percentage)|
|Not first: 601-660||6.64||10.43|
|Deep subprime: 300-500||14.66||07.21|
As your credit score goes down, you will have to shell out a lot of extra money over time for your car loan. If you have a credit score below 700, you will be asked why this is the case. You must be prepared to respond. Don’t expect friendly faces if you have a low number.
What can you do if you have a low score?
If your credit rating is low, don’t be discouraged. You might still be able to get a car loan. If you are someone who has debt elsewhere and therefore a low credit rating; but you managed to pay off all of your car debts on time, you might be considered for a decent loan.
You also need to have a stable job, a house and also need to be prepared to pay a decent enough down payment. When you go to get the loan, you will obviously be asked for some legitimate documents, such as proof of residence, bills, and full coverage auto insurance. You should also have documents showing that you recently paid your bills on time, even with a lower credit score.
You have to pay your bills on time. All of your bills should be paid on time to avoid any negative effect on your credit score. You should also keep your credit card balance low against your credit limits. This can have a positive impact on your credit score. Also, once you get a new loan, don’t try to get another one immediately after.
Finally, you should also keep your credit card accounts open. If you didn’t already know, you can also refinance the loan after 6 to 12 months. So, if you get a better score during this time, you may qualify for lower interest rates.
Can You Build A Credit Base By Paying Off Auto Loans? What is the minimum credit score required to get a car loan?
Yes you can. Paying off a loan on time helps you build your credit score. Paying off a car loan on time will help you establish your payment history and your credit mix.
As the name suggests, payment history is the history of your payments on time. It plays an important role in determining your overall credit score. The credit mix, on the other hand, indicates whether you have both installment loans and revolving credit. If you only have credit cards, then paying off a car loan on time will definitely help improve your overall credit score.