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Buying a car has the reputation of being quite the hassle; between pushy salesmen and the possibility of shady financing, the whole process can be a mess. But even before you go shopping for a car, you might be worried about whether your credit is even good enough to get approved for a car loan.
You might be surprised to know that there’s no hard-and-fast minimum credit score for a car loan. Even with bad credit, it’s possible to finance an auto loan So if your credit score is average or even below average, it doesn’t mean you can’t get a car. Individual lenders sometimes have minimums they’re not willing to go below, but there is usually a lender willing to loan you the money to buy a car. With that in mind, you should be wary when it comes to borrowing more than you can handle.
Some car dealers and finance companies use another credit score that’s more specific to auto loans, called a FICO Auto Industry Option. This score guages how you have handled auto loans in the past. If you’ve had a repossession, a history of late payments, collections, settlements on your past vehicles, or included a car in a bankruptcy, these are signs that you’re a high-risk borrower. They may still lend to you, but you’re more likely see a much higher interest rate.
Where your credit score truly comes into play is how the resulting car loan itself is structured. Things like interest rates, terms, and payment schedules and amounts all have a great deal to do with your credit score. The lower your credit score, for instance, the higher you can expect your interest rate to be.
How Can You Improve Your Chances of Getting Approved for a Car Loan?
There are a few steps you can take to potentially make your time sitting across from a lender a lot easier. First, make sure you already know your credit score – including your Auto Industry Option score – and what items are listed on your report. If there are errors on your report, take care of them or have documentation showing them to be incorrect. You should be able to answer questions about any late payments and why they occurred.
Secondly, ensure that you come to the table prepared; you may be asked for proof of residence, a cell phone or utility bill, pay stubs, or even proof that you have a current insurance policy offering full coverage on your vehicle. These things can show stability, ability to afford the vehicle in question, and responsibility – things that let lenders know you’re more likely to pay back the loan.
What Credit Score Do You Need to Qualify for Financing from a Dealer?
As we’ve already seen, there’s no absolute minimum. No matter how bad your credit is, there’s a used car dealer out there willing to finance you – at a potential exorbitant cost to you, of course. If you have truly poor credit and you can wait a few months to purchase your vehicle, it could help you to focus on rebuilding or improving your credit before setting out to find a dealer. Even raising your score a few points could potentially save you money on the interest rate or fees.
If you can’t wait and need the car now, you might have to bite the bullet on the higher interest rate, at least for a few months. The good news is that you can work on your credit after getting the car loan – including making timely payments on the new loan – and after six months or so, you may want to look into refinancing at a better rate with your new, higher score.
What Credit Score Do You Need to Qualify for Bank Financing?
While dealers are always interested in lending to someone at the highest rate possible, banks are only interested in lending to someone they’re certain will pay back the loan. As a result, there are banks that don’t lend to people with subprime credit, while some banks have even higher thresholds. Others, however, offer subprime loans with some caveats. Again, there’s no national minimum score; each bank sets its own policies.
Is It Easier to Get Approval for a Car Loan from a Credit Union?
Credit unions may be a cheaper option in the long run. They generally offer lower rates and fees associated with originating a loan. In terms of approval, they can sometimes be easier to get approved by for one reason – they only offer loans to their members.
If you’re a member, you may be able to take advantage of a credit union loan; if you’re not, however, you’ll need to join the credit union first by getting an account there. You’ll still need to know your credit score going in, and have the correct documentation to explain any issues. You’ll also need to show proof of income and other standard paperwork as well.
What Types of Financing are Available for Individuals with Poor Credit?
Even if you can’t walk into a bank and get approved for a car loan, you’re not out of the running yet. There are other options out there; you just need to be aware that you’ll likely pay higher fees and interest rates than the average borrower. You can look at “buy here, pay here” dealerships that offer in-house financing; they deal with subprime credit all the time – just make sure you’re not being overcharged.
Buying a car doesn’t have to be a horrible experience. Having the information and the tools going in means you can buy with confidence, and fully understand the credit score needed to buy a car.
Author: Jeff Gitlen