You may be surprised to learn that there’s no minimum credit score for car loans. Some lenders offer auto financing even for people with poor credit histories. However, your credit score plays a crucial role in the rates you get as well as which lenders will work with you.
In this guide to credit scores for car loans, we at the Home Media reviews team will explore what credit scores are, how they’re calculated and how they relate to auto loans. We’ll also explain what you can do to improve your credit score to help you find the best auto loan rates and best auto refinance rates for your situation.
Overview of credit scores and car loans
Your credit score is a numeric representation of your credit history. Lenders use this number to judge a borrower’s creditworthiness and determine what rates to offer them when they apply for an auto loan.
Most lenders use either your FICO credit score or your VantageScore, the country’s two most popular credit scoring models. To find your credit score, lenders consult one of the three major credit reporting agencies: Equifax, Experian or TransUnion.
Factors that make up your credit score
Although your credit score is represented as one number, several factors contribute to it. FICO and VantageScore weigh each factor differently, so your score will likely differ slightly between the two models.
The payment history in your credit report is the most influential factor in both credit scoring models. It’s a record of your monthly debt payments and whether you’ve made them on time. Missed payments and delinquencies will cause your credit score to drop.
Amounts owed and credit utilization
The amount of your available credit you’re using is called your credit utilization ratio. In general, the more of your available credit you’re using, the lower your credit score will be. This is because potential lenders could believe you have a higher risk of defaulting on loans.
Most experts recommend using no more than 30% of your combined credit limit. Using even less can help your credit score improve.
The higher the average age of your credit accounts, the higher your score. While having accounts that are at least several years old generally improves your credit score, having lots of new credit accounts can hurt it.
Having a diverse array of credit products on your report, such as personal loans, a mortgage or student loans, can help improve your score. In contrast, having too many of the same kind of credit account — such as credit cards — and not enough of others can bring your credit score down.
Opening too many new credit accounts within a short time period can make you look like a risky borrower. This means you could have a harder time getting approved for additional credit.
How credit scores affect car loan rates
Your credit score affects your car loan rates in a couple ways:
- Your eligibility: While there isn’t a universal minimum credit score to secure an auto loan, many lenders have minimum credit score requirements. If your score falls below the minimum, you likely won’t be approved for a loan.
- The rates you’re offered: Typically, borrowers with higher credit scores have access to lower rates for financing. Those rates tend to go up as a borrower’s credit score goes down.
Other factors that affect car loan rates
Your credit score is one of the most influential factors in the automotive finance rates you receive from lenders, but it isn’t the only one. Here are other variables that contribute to auto loan rates:
- Loan-to-value (LTV) ratio: The amount you want to borrow for a car compared to its value is known as the LTV ratio. A lower LTV ratio — in which the amount borrowed is less than the asset’s value — can result in a lower rate on a new or used car loan. You can bring this ratio down with a trade-in vehicle or by making a larger down payment.
- Debt-to-income (DTI) ratio: Your DTI ratio is how much you need to pay each month to meet debt obligations compared to your gross monthly income. Borrowers typically see lower rates as this ratio drops.
- Loan term: Most lenders offer a range of repayment terms. While longer loan terms come with lower monthly payments, they also usually come with higher interest rates.
- Discounts: Some lenders offer rate discounts. One common discount is given for setting up automatic monthly payments. Other lenders offer discounts for using their car buying services, if available.
- Vehicle details: Lenders consider your vehicle’s age, mileage and condition before agreeing to financing. Many have restrictions on those factors and may not finance vehicles that are too old, have lots of miles or have a salvage or rebuilt title.
Average auto loan rates by credit score
Credit bureaus place borrowers into ranges based on their credit scores. While rates within these ranges vary by borrower, the average interest rate for each category can provide insight into how credit scores affect car loans. This data from Experian’s State of the Automotive Finance Market Q4 2021 report shows those average rates.
Interest rate vs. annual percentage rate (APR)
You may see the terms “interest rate” and “APR” being used in similar ways. However, these are different concepts. Your interest rate is the cost of borrowing. APR, on the other hand, includes that cost in addition to fees and discounts rolled into the loan, such as an origination fee or an autopay discount.
Why interest rates matter when it comes to car loans
It’s important to consider your interest rate before signing on for a car loan, as it translates to how much borrowing will cost you. Even a small difference in the interest rate can make a big difference in what you pay in interest over the life of the loan.
According to Kelley Blue Book (KBB), the average cost of a new car in April was $46,526. The table below— which assumes a borrower requests a 72-month loan for 100% of the purchase price — shows how much they would pay in total interest based on the average interest rate for their credit band.
How to improve your credit score to get better car loan rates
If your credit score isn’t where you want it to be and lenders offer you higher interest rates as a result, there are ways to improve it. Building credit can take a long time — months or even years, depending on your current score and your goals. However, with an improved credit score, you’ll have an easier time finding car loans at lower interest rates.
Here are some steps you can take to improve your credit score:
- Make regular payments: It isn’t a quick fix, but making regular, on-time payments in full can eventually bring your credit score up.
- Pay debt off: If you can afford to do it, making larger payments to reduce your credit card balance or other debt can raise your score.
- Pause on applying for new credit: If you don’t need new credit or can afford to wait, avoiding hard credit checks can help keep your score from going down. That said, applying with multiple lenders for the same type of credit (such as an auto loan) within a short period of time only impacts your credit score once.
- Get different types of credit: If most of your credit is of the same type, such as credit cards, establishing other types of credit, such as a personal loan or a mortgage, can help your score increase.
- Talk to your creditor: If your credit score is low because of missed payments, you may be able to get your creditor to remove them from your report. There are several ways to try this, but a goodwill letter is often recommended, especially if you can prove a hardship such as a major life change.
Where to find car loans for different credit scores
There are a number of places where you can find auto financing. Borrowers with good credit scores have many more options and generally have access to lower interest rates than those with bad credit or even average credit scores. However, borrowers with credit issues still have options.
Banks are one of the more traditional sources of auto financing. Most banks offer lending solutions for used and new vehicle purchases. Many also offer refinancing and lease buyout options. While some banks offer financing for people with lower credit scores, most have minimum score requirements.
Credit unions function similarly to banks, but instead of being owned by shareholders or investors, they’re member-owned organizations. As a result, many credit unions offer low interest rates on auto financing. These institutions are also less risk-averse than for-profit banks, so they tend to have less strict lending requirements.
Many car dealerships have their own financing options, usually through third-party lenders. You may be able to find low financing rates at dealerships — some even offer 0% APR car deals for borrowers with excellent credit. However, dealerships are notorious for offering some of the highest rates on auto loans.
A newer option for auto financing is online lending providers. These lenders often cater to specific types of borrowers. This means borrowers who have trouble securing loans at financial institutions or dealerships may be more likely to get approval from providers that specialize in poor-credit or no-credit auto loans.
The bottom line on minimum credit scores for car loans
While auto lenders may have minimum score requirements, there isn’t a minimum credit score for car loans across the board. There are lenders that offer auto financing for borrowers with lower credit scores, and some even specialize in bad credit car loans. However, borrowers with lower scores will likely have fewer options and be offered higher interest rates.
Our team recommends getting loan offers from multiple lenders, regardless of your credit score. The offers you receive will show you the rates you might qualify for and allow you to compare. This can help you make the best decision for your personal finance situation.
Our recommendations for auto loans
Applying for auto loans with multiple lenders within a short time frame doesn’t impact your credit score more than filling out a loan application with just one. That means it doesn’t hurt to compare your options. We recommend taking a look at Auto Approve and LightStream in your search.
Auto Approve: Top Choice for Refinancing
Because Auto Approve is a refinance specialist, it doesn’t provide loans for buying new or used cars. But if you want to refinance your current loan or buy out your lease, the provider is certainly worth considering.
Auto Approve assigns each borrower a dedicated consultant to help find the best refinance auto loan rates. Those with good credit will find the best rates, but the company offers financing options for borrowers across the credit spectrum.
Keep reading: Auto Approve review
LightStream: Top Choice for Good Credit
While it may not be available to borrowers with poor credit, LightStream offers a wide range of auto financing options for those who qualify. The company has competitive auto loan rates for new and used car purchases, refinancing and lease buyouts. Unlike many lenders, LightStream doesn’t charge loan origination fees, prepayment penalties or late payment fees.
Keep reading: LightStream review
Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.
Here are the factors our ratings take into account:
- Reputation (25% of total score): Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
- Rates (25% of total score): Auto loan providers with low APRs and high loan amounts scored highest in this category.
- Availability (25% of total score): Companies that cover a variety of circumstances are more likely to meet consumer needs.
- Customer Experience (25% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness and helpfulness of each lender’s customer service team.
*Data accurate at time of publication.