Having a bad credit score can seem like a huge obstacle when you want to make a large purchase, and in many situations, it's a deal-breaker. For example, getting a mortgage with a credit score lower than 600 (on a 300 to 850 score range) would be extremely difficult in the current market. With auto loans, things are a bit different.
"There is not a minimum score I could say," said Rich Hyde, chief operating officer of Prestige Financial, an auto lender. "There are many lenders, many different opportunities, and there are many factors that go into an auto loan other than your credit score."
Those things include your debt-to-income ratio, income-to-payment ratio, employment history and past experiences paying auto loans. Your ability to get a car loan also heavily depends on the kind of car you're trying to finance, how much it costs and how much of a down payment you can make. The overall cost of the loan will vary depending on your monthly car payment and the loan term. Given the right mix of these elements you can still find auto financing despite having bad credit.
In the last few years, consumers with lower credit scores have increasingly found access to auto financing. In the last quarter of 2015, loan borrowers buying new vehicles had an average credit score of 711, down from 712 the previous year, according to data from major credit reporting agency Experian. (Experian uses the VantageScore 3.0 model, which has a scale of 300 to 850.) That average has gone down 6 years in a row, from its peak of 736 in 2009. People buying used cars tend to have lower credit scores than those buying new, but those borrowers' average credit scores are also down from the in-recession peak of 659. In the fourth quarter of 2015, the average credit score on a used loan was 649, up a point from last year.
"We're seeing the market kind of flatten out a bit," said Melinda Zabritski, Experian Automotive's senior director of automotive financing. "More consumers with lower credit score [are] able to get financing. Really the market has returned to what you would see pre-recession."
Applying for Auto Loans
With so many auto lenders out there, each with a focus on different credit tiers, the issue with auto loans isn't so much getting one as it is finding one that's affordable. The lower your credit score, the higher your interest rate will likely be, and you're probably also going to be limited in how much you can borrow.
If you want your pick of vehicle and auto financing, shoot for a credit score in the 700s, Zabritski said.
"Anything over 700, you're much more likely to have a wide variety of offers, and typically if you're above 720, typically you get the best offers," she said. That's when you start seeing incentives like 0% down or a promotional financing period.
Many common credit scoring models allow you to shop around for auto loans and count multiple inquiries in a short period of time as a single hard inquiry on your credit report. (Lots of hard inquiries can hurt your credit score.) Before you start looking at cars, see where your credit stands to get an idea of how you might look to a lender. You can see two of your credit scores for free each month on Credit.com. If your score is in bad shape, you may be able to improve your credit by disputing any errors on your credit report, finding out why your score is low and coming up with a plan to address those problems.
Once you are ready to secure financing, take the time to compare various offers to make sure you find a deal that's best for your short- and long-term budget.
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