Buying a car is a significant financial decision for most people, and one of the key factors that can influence your car-buying experience is your credit score. Your credit score plays a vital role in determining the interest rate you’ll be offered on your auto loan. In this post, address the question “What Credit Score Do I Need to Buy a Car?” by exploring the relationship between your credit score and car financing, with a particular focus on how credit scores impact the interest rates for new and used car loans. We’ll also discuss the role of Buy Here Pay Here (BHPH) financing and how it differs from traditional lenders in considering credit scores.
Understanding Credit Score Ranges
Before diving into the specifics of what credit score you need to buy a new or used car, let’s familiarize ourselves with the credit score ranges and their implications for auto loan interest rates. Credit scores typically fall into five categories:
- Great Credit (781-850): Individuals with credit scores in this range are considered low-risk borrowers. They enjoy the lowest average interest rates, making financing a car more affordable.
- Good Credit (661-780): Good credit scores still offer favorable auto loan terms, though the interest rates are slightly higher compared to those with great credit.
- Fair Credit (601-660): Borrowers with fair credit may face higher interest rates, but they can still secure financing for a vehicle.
- Poor Credit (501-600): As your credit score decreases into the poor credit range, interest rates rise significantly, which can make buying a car more expensive.
- Bad Credit (300-500): Individuals with bad credit scores face the highest interest rates and may find it challenging to obtain auto loans through traditional lenders.
Auto Loan Interest Rates Based on Credit Score
The data provided in the State of the Automotive Finance Market for Q2 2023 reveals the average for both new and used car loans across various credit score ranges interest rates are rising. Here’s a breakdown of the findings:
Great Credit (781-850):
- Average New Car Rate: 5.1%
- Average Used Car Rate: 7.1%
- % of Total Auto Loans: 20.2%
Good Credit (661-780):
- Average New Car Rate: 6.4%
- Average Used Car Rate: 9.1%
- % of Total Auto Loans: 45.1%
Fair Credit (601-660):
- Average New Car Rate: 9.0%
- Average Used Car Rate: 13.5%
- % of Total Auto Loans: 18.4%
Poor Credit (501-600):
- Average New Car Rate: 11.7%
- Average Used Car Rate: 18.5%
- % of Total Auto Loans: 14.6%
Bad Credit (300-500):
- Average New Car Rate: 14.2%
- Average Used Car Rate: 21.4%
- % of Total Auto Loans: 1.8%
From the data, it’s evident that borrowers with great credit scores enjoy the lowest interest rates, while those with bad credit scores face the highest rates. Your credit score can significantly impact the overall cost of your car loan, with lower scores resulting in higher monthly payments.
Used Car Loans by Lender Type
In addition to credit scores, the type of lender you choose can also influence your auto loan terms. The data further breaks down used car loans by lender type, differentiating between franchise dealers, independent dealers, banks, OEM captive finance, credit unions, and finance companies. Notably, Buy Here Pay Here (BHPH) financing is prominently featured in the independent dealer category.
Franchise Dealers:
- Banks: 35.7%
- OEM Captive Finance: 15.5%
- Credit Union: 31.9%
- Finance Companies: 14.4%
Independent Dealers:
- Banks: 13.3%
- BHPH: 39.4%
- Credit Union: 18.8%
- Finance Companies: 28.2%
BHPH Financing and Credit Scores
Buy Here Pay Here (BHPH) financing stands out as a unique financing option, particularly for those with poor or bad credit scores. In the BHPH model, the credit score is typically not part of the approval decision-making process. Instead, BHPH dealerships focus on your ability to make regular payments, often requiring proof of income and a down payment.
BHPH financing provides an alternative for individuals who may not qualify for loans from traditional lenders due to their credit history. However, it’s essential to be cautious when considering BHPH financing, as it often comes with higher interest rates and may involve purchasing older, less reliable vehicles.
Estimate Your Loan Amount and Get Approved
Ready to take the next step in your car-buying journey? Discover the maximum car loan amount you may qualify for by using our user-friendly online tool. Simply input your income and credit score range, and instantly, you’ll receive an estimate tailored to your unique financial situation.
Wrapping It Up
Your credit score plays a pivotal role in determining the interest rates you’ll be offered when buying a car. A higher credit score generally leads to lower interest rates, resulting in more affordable auto loans. However, individuals with poor or bad credit scores may still have options, such as BHPH financing, to secure a vehicle.
Before making a decision, it’s crucial to assess your credit situation and explore various lenders and financing options. Additionally, working on improving your credit score over time can open up more favorable auto loan opportunities, potentially saving you money in the long run. Ultimately, the credit score you need to buy a new or used car varies depending on your financial situation and the type of lender you choose, but it’s always wise to aim for the best score possible to secure the most favorable terms.
AutoByPayment.com offers accurate estimates of new and used car loan payments based on self-selected credit score, current rebates, down payment, and trade equity or negative equity, without customers having to provide their personal identifying information such as email and phone.