What Credit Score Is Needed to Buy a Car?

There’s a saying I’ve found to be true countless times over the years:

“In Europe 100 miles is a long way, but in America 100 years is a long time.”

America is massive and, even if you aren’t making cross-state journeys, it could be hours by car to get to the next large town over, or to reach a specialty store. The daily commute in the US in 2019 was almost a full hour for a round trip alone!

Combine that with an estimated 289.5 million registered vehicles in the US alone, it’s apparent just how vital cars are to our daily life.

So what happens when you need to buy a new car? Most of us don’t have the money to buy new out of pocket, so you’ll need to get some sort of auto finance, which will be affected by your credit score.

That’s why we here at Grow Credit are tackling what credit score is needed to buy a car in this post.

In this post we’ll cover:

What is a credit score?
What credit score is needed to buy a car?
Why you should care about auto finance
How does credit score affect car repayments?
How to raise your credit score without any effort

Let’s get started.

What is a credit score?

A credit score is a number which represents how confident lenders can be that you will be able to repay them. For example, someone with a low credit score will be seen as either unreliable or inexperienced in borrowing money, and so most lenders will be unwilling to let you take on any credit.

Having a bad credit score will also mean that, even if you are able to get access to a form of credit, it will usually come with a much higher interest rate to compensate for the perceived risk on the lender’s part. In other words, a bad score will make you either ineligible for credit, or mean that you have to pay a huge amount more to clear your debts.

A good credit score, however, has the opposite effect - it makes it easy for lenders to trust that you can repay them. This leads to being eligible for many more forms of credit (auto loans, mortgages, credit cards, etc), and generally having lower interest rates to boot.

Your credit score is made up of several elements, including:

Payment history (~35%)
Credit utilization (~30%)
Length of credit history (~15%)
Credit mix (~10%)
New credit (~10%)

We’ve already explored the ins and outs of each element of your credit score before, but for now all you need to know is this.

The most important factors to your credit score are making sure that you have a long and spotless payment history (repaying your debts on time), and that you never utilize more than around 30% of the credit you can take out at any given time.

Combined, these factors account for roughly 65% of your credit score, and so make a massive impact on lenders’ opinions of you. The sooner you can sort out those elements, the less time it will take to grow your credit score and thus make yourself eligible for more types of credit.

What credit score is needed to buy a car?

The short answer is also the most frustrating one - it depends!

If you have enough money to buy that flashy BMW, techy Tesla, or vintage VW outright, then you don’t need to worry about your credit score at all. All you need to do is pay for it, then drive away a happy customer.

However, if you don’t have enough money to outright buy a car, that’s where your credit score starts to matter.

As I stated earlier, your credit score shows lenders how confident they can be that you’ll pay back any money they give you on time. This, naturally, means that if you’re either borrowing money or borrowing the car you want for a certain amount of money, your credit score will be taken into account.

If you have a bad score (typically considered to be <580 on the FICO score) it will be harder to find someone willing to lend you the money for a loan, or the car on lease. Anyone who does give you credit will probably do so at a higher interest rate.

A fantastic score of 800+ will typically mean the opposite. You’ll be eligible for almost any loan or lease arrangement you want to take, and likely with a better interest rate.

However, not all of this is set in stone.

For example, according to Experian’s State of the Auto Finance Market report for 2020, any credit score below 600 is considered to be “Subprime” (less desirable), and people with these scores who lease their car or have a loan to pay it off are at a record low.

Combine this with the average credit score of people loaning or leasing cars being 671 for used and 733 for new models, and you have a very clear picture.

People with a credit score lower than 600 should probably reconsider seeking a credit solution for their car. It won’t be impossible to find a loan or lease you could afford, but chances are that it will be in the category of high interest rate credit.

Remember, credit score is (to lenders) a reflection of the risk you pose to their money. The lower your score, the more you’ll have to pay in interest to calm their fears.

We’ll circle back on how exactly your credit score can affect your car repayments shortly, but let’s explore why you should think about auto finance even if you have enough money to buy a car outright.

Why you should care about auto finance

Source by Marco Verch, used under license CC BY 2.0

First, let’s explore the pros and cons of auto loans and auto leasing.

The main difference between auto loans and auto leasing is that a loan will mean that you own the car until you decide to sell it. Leasing is more of an agreement with the company that owns the car to borrow it for a certain amount of time.

Personally, I would always rather own something than borrow it, but even I can see the benefits of leasing over loans.

Leasing a car will typically result in lower monthly repayments, as the value of the car is based on how much it will naturally depreciate during the time you have it. Couple that with the fact that you’ll be encountering fewer long-term repair bills (because you’re changing your car up every couple of years) and it can save you a lot of money in the long run.

However, any damage you incur will have to be paid for at the time you return the car if you lease. Remember - the car isn’t technically yours, and so you have to return it in good condition.

Taking out a loan for a car will mean that you actually own it. You can sell the car whenever you want if you get tired of it or simply don’t want it anymore, while early returns on a lease usually come with extra payments.

Not to mention that leased cars typically have mileage limits to prevent people from incurring more than the expected amount of wear and tear. If you’re planning on driving a lot or making a particularly big journey regularly, you might not be eligible for most lease contracts.

However, there are two massive reasons for loaning or leasing a car even if you can afford to buy it.

1. Auto financing will build your credit score

The first is that leasing and loaning cars can build your credit score.

If you keep an eye on your payments, make them on time, don’t break your contract and so on, just having those contracts and that payment history will increase your credit score.

Like any other form of credit, loaning or leasing will provide another avenue to fill out your credit mix and fill out your payment history. These alone account for roughly 45% of your credit score, so adding to them (as long as you keep track of your payments and make them on time) with auto financing is a great way to boost your score.

That’s not even mentioning how, aside from credit cards, auto finance is one of the most accessible ways to fill out your credit mix.

Put it this way; how many times in your life are you likely to take out a student loan? How about a mortgage? For most of us, these are one-time things (if at all), so it’s worth grabbing any extra chance to build out your credit profile when you can.

2. Financing allows you a much greater selection of cars

Let’s face it, cars are expensive.

If you’re looking to buy new (which is better if you can afford it) then you’re on average looking at the highest car prices of all time, at a record of $45,000. These have jumped over 12% in the last year (September 2020-1) and I don’t know about you, but I don’t have that kind of money lying around.

Financing makes getting a car possible when you don’t have all of the money saved away, letting you choose from a much wider selection of makes and models.

Not only that, but if your savings could cover the cost of a car but would be wiped out afterwards, it can leave you in a more financially stable position to finance at least part of the vehicle’s worth. That way you can leave yourself a buffer in the bank in case of emergencies and cover the monthly costs as and when they arrive.

So how does your score itself actually affect your loan repayments?

How does credit score affect car repayments?

First, a quick refresher on what Experian considers to be the different credit score bands.

Super Prime: 781-850
Prime: 661-780
Nonprime: 601-660
Subprime: 501-600
Deep Subprime: 300-500

In this report, Experian dives into various elements of the auto finance market, including the average size of auto loans and the average monthly repayments, split among their different score bands.

What they show is proof of just how much your credit score affects your monthly repayments.

Their lowest “Deep Subprime” band borrowed on average $4,956 less than those in their highest “Super Prime” band. However, despite borrowing less, their monthly repayments averaged out at $11 more.

That’s even considering the length of the loans, as “Deep Subprime” borrowers on average had loan terms roughly 7 months more than those of “Super Prime” borrowers.

In other words, someone with a credit score of 500 looking to take out an auto loan would pay roughly the same per month as someone with a credit score of 850. However, the person with the higher score would be able to borrow roughly $5,000 more and be paying for 7 months less.

If you want to finance your car (which is almost always a better option on the whole), it really does pay to have a higher credit score when applying.

So how exactly do you go about improving your score?

How to raise your credit score without any effort

There are many ways to increase your credit score, and most of them require waiting a long time or constantly juggling and managing multiple credit sources in addition to your regular finances.

However, there’s one way to make growing your credit score and managing your finances take less effort than ever before. That’s where Grow Credit comes in.

Grow Credit gives you an account which you can only use to pay off your monthly subscription services such as Disney+, Hulu, and HBO Max. This lets you effortlessly see exactly how much you’re spending on services per month, making it easy to see if you’re paying too much and need to cut down.

Not only that, but your Grow Credit does just that - it grows your credit score while you pay off those monthly subscriptions!

By using Grow Credit you can turn something you’re doing anyway (eg, watching Netflix) into a benefit for you later when you’re applying for a loan, credit card, or even for auto finance.

Sign up today and start your credit journey!