What Credit Score Do I Need to Buy a Car?

Your credit score is the single most important factor when it comes to buying a car. Here is everything that you need to know about credit and car loans.

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Adam Moelis
May 18, 2022
8 min read

Buying a car is a serious financial commitment, and it’s one of the most expensive purchases that you’ll make. In January of 2022, the average price of a new car surpassed $47,000 for the first time ever. There’s no telling how high the average price could rise in the future.

Unless you’re really smart with saving money, then you probably don’t have that kind of money in cash. You shouldn’t feel too bad about that because there are very few people that do. That leaves you with only one option for buying a new car: getting a car loan.

What Are the Main Factors Involved With a Car Loan?

There are several factors that can influence your ability to secure a car loan. Banks and credit unions will consider all relevant financial information when reviewing a loan request of any kind.

These are the most important factors that will determine whether your car loan is accepted or denied:

  • Credit Score: The most important factor that affects your loan status is your credit score. Lenders will rate your ability to repay a loan based on your overall score. The higher your credit score is, the more likely that your loan will be granted. Your credit score also has an overall impact on the interest rate of your loan. 
  • Monthly Income: Lenders want to know that you’re financially stable and will typically require proof of employment. They also want to know how much you make so they can determine how easily you’ll be able to afford your monthly payments. A monthly payment that’s more than 50% of your income could easily lead to you falling behind.   
  • Down Payment: A lot of people trade in their old vehicle as a down payment to reduce the total loan amount of a new car. You don’t have to do this, but you’ll need to supply a down payment. A bigger down payment means a smaller loan and increased odds of acceptance. 
  • Term Length: The majority of car loan terms are between 36 and 72 months. That’s the amount of time that you’ll have to repay the loan. The total amount of the loan is divided by the term length to create even monthly payments. A longer-term length will mean smaller monthly payments but more money paid in interest.

What’s the Minimum Credit Score Needed for a Car Loan?

Interest rates are constantly changing as they can shift dramatically based on the market. To give you an idea of how much your credit can impact your interest rate, here are the credit score categories used by auto lenders in the second quarter of 2020:

  • Deep Subprime (300 to 500) had an average interest rate of 13.97% for new cars and 20.67% for used cars. 
  • Subprime (501 to 600) had an average interest rate of 11.33% for new cars and 17.78% for used cars.
  • Non-Prime (601 to 660) had an average interest rate of 7.14% for new cars and 11.41% for used cars. 
  • Prime (661 to 780) had an average interest rate of 4.21% for new cars and 6.05% for used cars.
  • Super Prime (781 to 850) had an average interest rate of 3.24% for new cars and 4.08% for used cars. 

Seeing the differences in these interest rates doesn’t really paint an accurate picture of the money involved. Let’s say that you are buying a new car for $47,000 and make a down payment of $7,000. You’ll need a $40,000 loan and decide to make it an even five years (60 months).

Here is what your monthly payments will look like depending on the interest rates listed above:

  • Deep Subprime (300 to 500) would have a monthly payment of $930.11 and cost a total of $15,806.48 in interest. 
  • Subprime (501 to 600) would have a monthly payment of $876.29 and cost a total of $12,577.66 in interest.
  • Non-Prime (601 to 660) would have a monthly payment of $794.69 and cost a total of $7,687.56 in interest.
  • Prime (661 to 780) would have a monthly payment of $740.46 and cost a total of $4,427.46 in interest.
  • Super Prime (781 to 850) would have a monthly payment of $723.02 and cost a total of $3,381.30 in interest.

A credit score is the single most important factor involved with a car loan, but it’s not the only one. That means that there really isn’t a minimum score that you have to meet to get a loan. Each lender has its own set of unique qualifications, and every loan has different details.

There are some lenders out there who specialize in giving loans to borrowers with bad credit. There are others that will deny anyone with a credit score under 800. It really just depends on where you go.

The biggest way that your credit score will impact your car loan is by the interest rate. Anytime that you take out a loan, there will be a certain percentage of the total amount factored into your monthly payments. Just a few percentage points can add up to thousands of dollars.

Based on these examples, you could potentially wind up paying over $200 more each month and more than $12,000 in interest because of your credit score. None of that money will add any value to the car and will go straight into the lender's profit margin.

What Factors Make Up Your Credit Score?

Here are the five most important factors in the credit score formula:

  • Payment history (35%)
  • Total debt (30%)
  • Credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

Credit scores are obviously very important in the financial world and come with long-lasting consequences. Although they might seem complicated from an outside perspective, they’re actually a fairly simple formula.

Payment History (35%)

The single most important factor involved with your credit score is your payment history. Missing one scheduled payment for a credit card, student loan, mortgage, or car loan can have a severely negative effect on your credit. The longer that your payment is late, the bigger of a hit to your credit score.

Lenders want to be sure that you’ll be making payments on time when you repay your loan. A low credit score would indicate that you have a poor history of making payments on time. If they think you might frequently be late with payments, they’ll require a higher interest rate to compensate.

Total Debt (30%)

The total amount of money that you owe is just behind payment history in terms of importance. A lender might feel nervous granting a loan to someone that’s already accumulated a large amount of debt. The fastest way to tell how someone is handling debt is by looking at their credit utilization ratio.

The formula for your credit utilization ratio is simple. It’s the total amount of credit that you are using divided by the total amount of credit limits that you have. Let’s say that you have four credit cards that have a combined limit of $12,000. If you charged $9,000, then you would have a credit utilization ratio of 75%. Experts recommend that you keep your ratio under 30%, or your score can drop.

Credit History (15%)

Credit history is simply the total length of time that you’ve had open credit accounts. The formula is based on your oldest credit account, your newest credit account, and the average age of all your credit accounts. This one is pretty simple: the longer that you have a credit history, the more beneficial it will be to your credit score.

New Credit (10%)

Applying for a new line of credit will typically require a lender to make a hard inquiry about your credit report. The request is recorded on your credit score and will usually take off around five or ten points at most. While that’s not usually a significant number, it can quickly add up if you’re applying for a lot of loans or credit cards. 

That could signal to lenders that you are desperate for a loan and might be struggling financially. You should only be applying for credit if you need it because a hard inquiry will take about two years before it falls off your credit report. 

Credit Mix (10%)

Having a diverse portfolio of open credit accounts can help to boost your credit score. Top scores usually include a variety of accounts, including mortgages, car loans, credit cards, and student loans. Having a healthy mix is important, but it’s not as beneficial as keeping a low credit utilization ratio. There’s no need to take out a loan that you don’t need just to add some variety to your credit report. 

How Can You Get a Car Loan With Bad Credit?

If you are in desperate need of a new car, these are a few things that you can do to secure a loan that doesn’t have a crippling interest rate: 

  • Make a bigger down payment
  • Get a cosigner for your loan
  • Prove that you’re financially stable
  • Go to the right loan lender

Ideally, you should build up your credit as much as possible before getting a car loan. It might take some time, but making payments on time and reducing your credit utilization ratio can help raise your credit score. 

Make a Bigger Down Payment

Down payments are paid upfront and help you to build value in your car early. They’ll indicate that you’re serious about making payments and will lower the overall amount of the loan. You might not be able to get a lower interest rate, but a smaller loan will help to reduce the monthly payments. 

Get a Cosigner for Your Loan

A cosigner is someone that it’s willing to apply for a loan with you. They’ll be sharing the responsibility for the loan and will be on the hook if you don’t make payments. You’ll probably need to enlist the help of a family member or close friend. If their credit is good enough, it could significantly lower the total interest rate of your loan.

Prove That You’re Financially Stable

Lenders assign higher interest rates to compensate for the risk they assume by granting a loan. You might be able to calm some of their concerns by providing pay stubs, proof of address, and other such documents that prove you’re financially stable. It’s possible that they’ll be willing to lower your interest rate if you can show that you’ll be able to afford your monthly payments.

Go to the Right Loan Lender 

There are plenty of loan lenders and dealerships that specialize in granting loans to people with poor credit. These places can often be predatory, and you should only consider them as a last resort. You’ll need to be careful and read the fine print, but you might not have a choice if your credit score is low enough. 

How Can Using Yotta Help?

Yotta is a bank account option that functions in a similar way to traditional banks and credit unions. While Yotta isn’t an auto loan lender, you can use it to quickly save up money for a down payment. The chances are high that you already have a checking or savings account. The difference between them and Yotta is the interest that you’ll generate. 

Pretty much all savings accounts will come with an interest rate. The bank will literally be paying you to keep your money deposited there. These rates are a percentage based on the total amount in your account. That means the more money you have, the more money you’ll receive in interest. 

The only drawback is these interest rates are typically very low. The majority of savings accounts come with an interest rate of 0.01%. That will only pay out a few dollars each year. It’s going to take a very long time to save up enough money to buy a car if you’re only getting a few cents each month.

Yotta has a different method of paying interest. Every week, you’ll be given one ticket for every $25 that’s in your Yotta account. That means that if you have $1,000 in your account, then you’ll be getting 40 tickets. Throughout the week, there will be a daily drawing at 9 PM EST. The more numbers that match your ticket, the higher the prize that you’ll win.

The grand prizes include a $10 million jackpot for matching six numbers and the Yotta Ball. Matching six numbers without the Yotta Ball will land a brand new Tesla Model 3. You won’t need a car loan with a $10 million prize or a new Tesla. Neither of these outcomes is possible with a traditional savings account.

The Takeaway

Every lender has different criteria for granting car loans. The minimum credit score requirement can change based on the lender and a few other details. While you’ll probably be able to get a car loan with bad credit, it’s not a very good idea. 

The interest rate can wind up being so high that you’d be paying a few thousand dollars extra. Ideally, you should save up some money and slowly improve your credit score instead. 

Using Yotta can help you quickly save money. The more money that you save, the more tickets you’ll receive, and the more chances you’ll have to win the daily sweepstakes. With a little bit of luck, you could win enough to buy a brand new car in cash or win a Tesla Model 3.

Visit Yotta to create an account and get started. The sooner that you start saving, the more chances you’ll have to win the jackpot. 

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