The higher your credit score, the better your loan offers.
Published April 29, 2019|4 min read
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If you’re buying a new or used car, odds are you’re buying it with a car loan. While some people can afford to buy a car with cash, many people take out car loans to pay for their new vehicle. But, when you’re getting a loan for a car, the types of offers you get from lenders will depend on your credit score.
The higher your credit score, the lower the interest rate you’ll be offered when you apply for a car loan. Credit scores range from 300 to 850, and, while you may see different scales used to describe credit scores, generally the scores are ranked as follows:
800 to 850 = exceptional
740 to 799 = very good
670 to 739 = good
580 to 669 = fair
300 to 579 = very poor
Applicants who fall within the better credit score tiers will get the lowest interest rates on car loans when they’re buying a new vehicle. Many car buyers will fall into the very good or good range, but if your credit score is lower than that, it doesn’t mean you won’t be able to get a car loan.
A credit score is a composite number that lenders use to measure how likely you are to be able to pay back a loan. But you actually have more than one credit score. In fact you probably have hundreds. Credit scores are calculated based on your credit report, which is a compilation of financial information about you from your lenders and creditors. There are three main credit bureaus, Equifax, TransUnion and Experian, all of which generate credit reports.
Your credit score takes information from your credit report to calculate a score. But, in addition to the multiple credit bureaus, there are also multiple scoring models used to spit out credit scores.
One of the most widely-used of those scoring models is FICO, named after Fair, Isaac and Company, the company that originally created it. The FICO model uses a specific algorithm to calculate your credit score. The actual algorithm FICO uses is proprietary, but we know your FICO score is calculated through a combination of different categories, the most significant of which are:
Your payment history, or whether you make mortgage, credit card and loan payments on time.
Your credit utilization, or the percentage of your available credit that you’re actively using.
The length of your credit history, or how long your accounts have been open.
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Even within the FICO model though, you’ll have multiple scores. FICO will generate a generic score as well as a specific auto score, a mortgage score, a personal finance score and more. And, while FICO is a big name in the credit score world, it’s not the only player in the game. Your lenders might use the VantageScore model, another scoring system.
When you apply for an auto loan, or any kind of loan for that matter, you may not know exactly which of your many credit scores the lending institution will look at, whether it’s your FICO auto score or your generic FICO score, a VantageScore or another credit score entirely. But don’t panic, because most of your many credit scores will fall within a few points of each other.
Whatever credit score you see for yourself is probably very close to what lenders are seeing, so if you keep an eye on your credit score and check it regularly, you won’t have any big surprises when you apply for an auto loan.
There are a number of ways to check your credit score for free. If you have a credit card, you may be able to check your credit score for free through your account, or you might receive it as part of a monthly statement. You can also check your credit score through your bank account or a number of websites and apps for free.
When you apply for an auto loan through a bank, credit union or auto dealership, your credit score will be one of the most important factors the lenders consider when offering you a loan. But that doesn’t mean it’s the only thing that matters: If you get a car loan through your bank or credit union, having an existing relationship can help you secure a better rate. And auto dealerships may be able to offer you special deals, or give the options from different lenders to help you find a good rate.
If you have a poor credit score, however, you’ll be considered a subprime borrower and it’s unlikely that any lender will offer you their best interest rate. There are some things you can do to ensure you’re saving as much as possible.
Shop around to make sure you’re getting the best rate possible for your credit score.
Ask someone to co-sign with you. If you have a friend or relative who is willing to serve as a co-signer on the car loan, that can help you secure a much better rate. A co-signer is basically agreeing to take on your debt if you can’t afford to pay, so it makes lenders much more comfortable lending to you.
Watch out for shady practices. Avoid lenders who offer “guaranteed approval,” because that usually means you’ll pay much higher interest rates. And don’t agree to a loan that says it’s subject to approval, because it means the lender can offer you one monthly payment up-front and then change the terms later.
Improve your credit score. Take steps to bring your score up, like paying off debt and making all your current payments on time. If you improve your score, you may be able to refinance your auto loan for one with a better rate down the line.
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