Which Credit Score is Needed to Buy a Car?

The credit score needed to buy a car depends on the lender. Most lenders use the FICO Auto Score when determining risk for auto loans. But there are four different versions used by lenders to evaluate risk: FICO Auto Score 8, FICO Auto Score 2, FICO Auto Score 4, and FICO Auto Score 5. In Q3 of 2016, the average credit score needed to buy a new car was 714 and 655 for a used vehicle. Your current employment situation and your debt-to-income ratio are two additional factors lenders use to determine your credit riskiness.

For most people, purchasing an automobile is a major financial action. The necessity of some form of loan or financing is the reason for this. As is usually the case, your credit rating has an outsized impact on the financial options that will be available to you. Though, as we will further demonstrate, it is not simply a pure reading of your credit rating that will determine the types of financing lenders will be prepared to offer you. In this article, we will be looking at the credit score and other factors necessary to buy a car. Check your credit score before applying for an auto loan:

What Credit Score is Needed to Buy a Car?

As was alluded to above, the credit score needed to buy a car is only part of the problem. In practice, the credit score needed to buy a car also depends on the lender. Most lenders use these three credit scores: The Equifax Beacon 5.0, the Experian/Fair Isaac Risk Model V2SM, and the TransUnion FICO Risk Score, Classic 04. There are multiple scoring models, but 90% of the top lenders in the United States use scores developed by the Fair Isaac Corporation (i.e. FICO scores). Here is where it gets complicated: you have more than one FICO score. The score that creditors use to evaluate you as a credit risk depends on the type of credit you are applying for.

Most pertinent for us here, the credit score needed to buy a car would be determined by your FICO Auto Score. This is an industry standard used by auto lenders to determine your credit risk. But it does not stop there because the FICO Auto Score can be broken down even further into four different versions. FICO Auto Score 8 is the most recent version, but some lenders still use the older versions (e.g. FICO Auto Score 2 [Experian], FICO Auto Score 4 [TransUnion], or FICO Auto Score 5 [Equifax]). A lender could use any one of these scores, but they are likely to pick the one that best predicts your likelihood to default.

Credit Score vs. FICO Auto Score

You may know your FICO score, but do you know your FICO Auto Score? Do you know any of the other variations of your FICO score? Whether you are looking to buy a car or apply for a credit card, you need to know. Click here for access to all your FICO credit scores.

According to 2016 data, the average loan amount for a new car in Q3 was $30,022 (a 4% increase over the previous year). For used cars during the same period, the average loan amount was $19,227 (a 2% increase). Additionally, the loan terms during this period were 68 and 66 months, respectively. The average credit score needed to buy a car during this period was 714 and 655, again respectively. The data also indicates that an estimated 23% of loan financing went to people with scores 600 and below. Conversely, people with scores 661 and above received 57% of loan financing. People with credit scores between 601 and 660 received the remainder. The implication is that if your credit score is not at the average, then you may still qualify for financing.

How Credit Scores Impact Interest Rates

But you do need to be aware that the lower your credit score, the more you are going to be paying for that financing. Still using the 2016 data, we see that people with credit scores of 600 to 501 paid 10.65% for a new car loan and 15.72% for a used car loan. Below 500 (e.g. 500 to 300), individuals paid 13.53% for a new car loan and 18.98% for a used car loan. As you might expect, people with higher credit scores paid less. People closer to the average credit score (e.g. 660 to 601) paid 6.39% for a new car loan and 9.47% for a used car loan. Those with credit scores of 780 to 661 paid 3.59% for a new car loan and 5.12% for a used car loan. Finally, people with the highest credit scores of 850 to 781 paid 2.6% for a new car loan and 3.4% for a used car loan.

In closing, we would like to point out two other factors which lenders consider alongside your credit score. Your current employment situation is an important part of your credit risk. The more time that you have spent with an employer, the less risky you appear to lenders. The other factor (equally important) is your debt-to-income ratio. This ratio represents the amount of your monthly gross income that goes towards paying off debts. Lenders prefer a ratio of less than 45% but 60% is okay if you have good credit. Generally speaking, the lower your debt-to-income ratio the better off you are.

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