Understanding Your Credit Score and Financing a Car: Tips and Best Practices

Updated on January 6, 2023

Questions Answered in this Article

What is the average credit score for a new car loan or lease? Answer: The average credit score for a new car loan or lease is 738.
What percentage of car financing goes to people with credit scores below 500? Answer: Less than 2% of car financing goes to people with credit scores below 500.
How can having a good credit score save you money when financing a car? Answer: Having a good credit score can save you money on car financing by getting you a lower interest rate. For example, a credit score of 661 or above can get you an annual percentage rate of around 4.90% or lower on a new car loan, or around 5.47% or lower on a used car loan.
What is a FICO auto score and how can you check it? Answer: A FICO auto score is a specialized credit score that ranges from 250 to 900 and places more emphasis on past car loan payments and previous repossessions or auto loan bankruptcies. You can check your automotive score by purchasing a full set of FICO scores at myFICO.com and then canceling the service, rather than paying the monthly fee.
What are some factors beyond your credit score that can help you secure financing for a vehicle purchase? Answer: Factors beyond credit score that can help you secure financing for a vehicle purchase include having a larger down payment, bringing documents that demonstrate your financial stability to the finance office, and shopping around for financing options. Additionally, having a cosigner with good credit may also improve your chances of approval.

Summary

A report released in December for Q3 2022 revealed that the average credit scores for people financing cars had slightly increased from the previous year.
The average credit score for a used car loan or lease was 678, while the average score for a new car loan or lease was 738.
Approximately 66% of cars financed were for borrowers with credit scores of 661 or higher, while borrowers with scores between 501 and 600 made up about 14%. Less than 2% of financing went to people with scores below 500.
A lower credit score may lead to a higher interest rate and higher payments when financing a car.
Having a good credit score can save you money on car financing by getting you a lower interest rate. For example, a credit score of 661 or above can get you an annual percentage rate of around 4.90% or lower on a new car loan, or around 5.47% or lower on a used car loan.
Dealers may use a FICO automotive score, which is a specialized score that ranges from 250 to 900 and places more emphasis on past car loan payments and previous repossessions or auto loan bankruptcies.
Factors beyond credit score that can help you secure financing for a vehicle purchase include having a larger down payment, bringing documents that demonstrate your financial stability to the finance office, and shopping around for financing options. Additionally, having a cosigner with good credit may also improve your chances of approval.

The Importance of Credit Score in Car Financing

According to the data, the average credit score for a used car loan or lease was 678, while the average score for a new car loan or lease was 738. The report also found that approximately 66% of cars financed were for borrowers with credit scores of 661 or higher, while borrowers with scores between 501 and 600 made up about 14%. Less than 2% of the financing went to people with scores below 500.

While having a lower credit score does not necessarily prevent you from getting a car loan, it could lead to a higher interest rate and higher payments. To improve your chances of securing a car loan, consider having a larger down payment, shopping around for financing, and bringing documents that demonstrate a good payment history on other major purchases.

Saving Money with a Higher Credit Score

Having a good credit score can save you money when it comes to financing a car. Interest rates on car loans vary based on your credit score, so it’s helpful to know what to expect when budgeting for a car. According to data from Experian, a credit score of 661 or above should get you an annual percentage rate of around 4.90% or lower on a new car loan, or around 5.47% or lower on a used car loan. On the other hand, someone with a credit score in the mid-500s may see rates of 15.86% or higher on a used car loan.

Using a car loan calculator can help you see the impact of these differences. For example, on a five-year, $20,000 used car loan with no down payment, a borrower with a higher credit score may have a monthly payment of around $382, while a borrower with a lower credit score may have a monthly payment of $485. Over the life of the loan, the borrower with better credit would pay approximately $2,904 in interest, while the borrower with lesser credit would pay around $9,105. Additionally, in most states, a lower credit score can lead to higher car insurance rates.

Even for new car loans, the difference in rates based on credit score can be significant. Borrowers with credit scores in the low 700s can expect an average rate of 4.90%, while borrowers with credit in the mid-500s may see an average rate of 10.11%.

What is a FICO auto score?

It’s a good idea to have an understanding of what dealers will see when they check your credit profile, including your credit score. However, it’s worth noting that dealers may use a FICO automotive score, rather than a traditional FICO score or VantageScore.

A FICO auto score is a specialized score that ranges from 250 to 900, and places more emphasis on past car loan payments than a traditional FICO score does. It also gives greater weight to any previous repossessions or auto loan bankruptcies. To check your automotive score, you can purchase a full set of FICO scores at myFICO.com and then cancel the service, rather than paying the monthly fee.

Improving Your Chances of Approval Beyond Credit Score

Purchasing a vehicle can be a daunting task, especially if you have a credit score that falls below the desirable 700 mark. However, it is important to remember that there are other factors that can help you secure financing for your vehicle purchase beyond just your credit score.

One way to improve your chances of approval is by bringing a larger down payment to the table. A big down payment can not only lower your monthly payments, but it may also help you secure a lower interest rate. Some lenders may also view a large down payment as a sign of financial responsibility, despite a lower credit score.

In addition to a larger down payment, it can also be helpful to bring documents that demonstrate your financial stability to the finance office. This can include pay stubs, proof of address, and other information that shows your reliability as a borrower.

Another option to consider is securing your own financing through a local bank or credit union, rather than relying on dealership financing. Comparing rates and securing preapproval can help make the process run smoothly. However, it is important to keep in mind that applying for financing can result in a “hard pull” on your credit, so it may be helpful to cluster your applications closely together when shopping for a loan.

If you do end up with a loan that has a higher interest rate than you had hoped for, don’t despair. After making on-time payments for six to 12 months, you may be able to refinance your auto loan at a lower rate. By focusing on these other factors, you can improve your chances of securing financing for your vehicle purchase, even with a less-than-perfect credit score.

Build your credit before car shopping

If you are having difficulty securing favorable car loan rates, it may be a good idea to focus on building your credit before proceeding with a vehicle purchase. Here are some steps you can take to improve your credit:

Pay your bills on time: Late payments can have a significant negative impact on your credit score, so make sure to pay at least the minimum amount due on time.
Keep your credit card balances low: The amount of your credit limits that you are using, also known as your credit utilization, has a significant effect on your credit score. To improve your score, try to keep your credit utilization as low as possible.
Avoid applying for other credit within six months of applying for a car loan: Multiple credit applications in a short period of time can have a negative impact on your credit score.
Keep your credit card accounts open: Unless there is a specific reason to close them, it is generally best to keep your credit card accounts open. Closing credit cards reduces your overall credit limit, which can hurt your credit utilization and negatively impact your credit score.

By following these steps and being proactive about building your credit, you will be in a better position to secure favorable car loan rates when it is time to make your purchase.

Your car loan can help you build better credit

A car loan can be an effective tool for building and improving your credit in two key areas: payment history and credit mix.

Payment history, or your track record of paying bills on time, is a major factor in determining your credit score. Traditional lenders will report your car loan payments to the three major credit bureaus, which use this information to calculate your credit scores. It is important to note that not all lenders report payments to credit bureaus, so it is essential to choose a lender that does. This will ensure that your car loan payments are factored into your credit score and help you build credit.

Credit mix refers to the types of credit accounts you have, such as installment loans with fixed payments over a set period and revolving credit with variable payments and no set end date (such as credit cards). Having a diverse mix of credit accounts can be beneficial for your credit score. If you primarily have credit cards, adding a car loan to your credit mix may help improve your credit score.

Overall, a car loan can be an effective tool for building and improving your credit, as long as you make timely payments and choose a lender that reports to the major credit bureaus.

Conclusion

Based on the information provided in the article, it is clear that having a good credit score can greatly benefit an individual when financing a car. A higher credit score may lead to a lower interest rate and lower monthly payments, potentially saving a borrower thousands of dollars over the life of a car loan. However, it is important to note that even if an individual has a lower credit score, there are still options available to help them secure financing for a vehicle purchase, such as having a larger down payment, demonstrating financial stability, and shopping around for financing options. It is also worth considering seeking the assistance of a cosigner with good credit.