What’s the minimum credit score needed for an auto loan?

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In a Nutshell

Less-than-perfect credit scores probably won’t disqualify you from a car loan, but they can affect the loan terms and interest rate. Generally, the lower your credit scores, the more you’ll be charged in interest. But there are several ways you can help reduce the interest you pay over time.

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While there’s no universal minimum credit scores required for a car loan, your scores can significantly affect your ability to get approved for a loan and the loan terms.

Low credit scores could result in fewer offers and higher interest rates. But that doesn’t necessarily mean you should throw in the towel if your scores aren’t where you want them to be. Read on to better understand potential barriers and ways you can increase your chances of approval and receive better offers.

How do my credit scores affect my car loan?

Before you begin car loan shopping, it’s generally a good idea to check your credit scores and understand how they can influence your auto loan terms. This is also an opportunity to check your credit reports for errors, which could bring your credit scores down.

Your credit scores can have an impact on your car loan-shopping experience in two ways.

1. They can affect your ability to get a loan from some lenders

The credit-reporting agency Experian reports that only 38.3% of loans issued in the third quarter of 2018 were to borrowers with credit scores of 660 or lower. The average credit scores for a new auto loan were 717, while the average scores for used car financing were 661.

While you may be able to get approved with lower scores, the pool of possible lenders will be smaller than if your scores were higher.

2. Lower credit scores can drive up the interest rate offered to you

Someone with lower credit scores is considered a higher-risk borrower. To offset risks, the lender will often extend a higher interest rate.

According to Experian, for those with scores of 660 or less, average loan interest rates in Q3 2018 ranged from 7.52% to 14.41% for new vehicles and 10.34% to 18.98% for used cars.

These rates are much higher than the averages for those with prime or super-prime scores. Experian considers scores of 661 to 780 to be prime, and scores of 781 to 850 to be super prime. In Q3, people with scores above 660 had average interest rates of 3.68% to 4.56% for new cars and 4.34% to 5.97% for used vehicles.

A few extra percentage points may not seem like a big deal, but when that percentage is applied to the thousands of dollars that car loans typically amount to, it adds up quickly.

Here’s how this plays out in reality. Let’s say two borrowers — one a prime borrower and the other subprime — are looking to finance $10,000 on a used car loan. They both have a 60-month loan term. The subprime borrower is offered a 16.14% rate — the average for borrowers in this range in the third quarter of 2018, according to Experian. The prime borrower is offered the average 5.97% rate.

Over time, the subprime borrower will pay back $14,633, or $4,635 in interest. The prime borrower will pay about $1,593 in interest, for a total of $11,593. That’s a difference of $3,040 in interest paid, and in this case it all came down to credit scores.

Taking steps to improve your credit could result in increased loan approvals with better offers, keeping more dollars in your pocket in the long run.

Wait and save

If you’re able to wait to buy a car, there are a couple of ways you may be able to save on your auto loan.

Work on your credit scores

Working on your credit scores could unlock lower interest rates and preapprovals by more lenders. Your scores are largely dictated by whether you pay your bills on time and how much debt you have. Focusing on these two factors could be a huge help in improving your credit.

Save up for a down payment

Paying more upfront will decrease the amount you need to borrow, helping you pay less interest.

Increase your odds

If you need a car now, there are still a few ways you can increase your chances of getting approved for a loan and reduce your interest rate over time.

Build credit, and then refinance

It’s always worth working on your credit scores, even after your purchase. Doing so could allow you to refinance your auto loan for a lower interest rate in the future.

Consider a co-signer

Having a co-signer with higher credit scores on your loan may help you get approved more easily. After you improve your own credit, you may be able to remove the co-signer from your loan if you refinance.

Keep shopping

If you haven’t found a rate that works for you, continue looking. Credit Karma Auto can help with this by showing your estimated loan term, interest rate and monthly payment amount across lenders.

Bottom line

Your credit scores can impact your chances for approval, as well as the interest rate and terms you’ll be able to get on a car loan. If you can wait to buy and use that time to focus on improving your credit, your hard work could pay off. But if you must buy now, focus on paying bills — including your monthly car loan payments — in full and on time to boost your credit and put yourself on the road to better interest rates and financial success in the future.