Unless you have the necessary cash to purchase a car, you're going to need to finance the vehicle of your choice. If you haven't done a lot of car shopping in your life, you may be wondering what credit score you need to secure an auto loan. There are a lot of factors that come into play when applying for an auto loan, and there's no magic credit score that will get you approved.
Range of Credit Scores
The terms "Good credit" and "Poor credit" don't really mean anything if you have no idea what constitutes as good and poor credit. A credit rating of 740 and above is considered excellent, a score of 650 to 730 is considered very good, while a score of 620 to 640 is considered good and anything below 600 is considered poor. Excellent credit scores always get you the best terms and poor scores get you the worst.
Guaranteed Credit Approval
Some dealers promote guaranteed financing, and it's true that you're guaranteed to get financed for a car, even if you have a 350 credit rating, but only if you meet the requirements. Most guaranteed credit approval advertisements make it appear that you can walk into a dealership, ask for a loan and receive it, but that's not true. Any dealer who advertises guaranteed credit approval works with subprime lenders, which are lenders who work with borrowers with poor credit scores. Subprime lenders always require a down payment, and generally the down payment increases with a lower credit rating. Subprime lenders also require proof of income and proof of residence. Your interest rates are always higher with subprime lenders as well.
Dealer vs. Bank Financing
Your credit rating may be less of importance if you try to qualify for a loan through your bank or credit union. Your financial institution is usually willing to work with you, since you are a member and have a history with the institution. A credit score of 600 may get you a loan through your bank, but it might not get you a loan through the financial institutions that the dealership goes through. The interest rate is usually lower if you go through your bank or credit union, because dealers take a cut on all financing deals they land, according to Edmunds.com.
Terms of the Loan
It's not so much of whether you can get a car based on your credit score as much as it is what kind of loan you can get with your credit score. Unless your credit rating is abysmally poor, such as 350, you'll probably be able to land a loan if you look around long enough. Your credit score mainly affects what kind of loan you can qualify for. Only excellent credit scores can qualify for a zero percent APR interest rate, for example, while a credit score of 620 may get you a loan with a 10 percent interest rate.
Co-signer
Your credit rating becomes even less of an issue if you have a co-signer who has a good credit rating. A co-signer is someone who agrees to take on the loan should you fail to make the monthly payments. Financial institutions almost always approve you for a loan if you have a co-signer that has established credit and a good credit score. A co-signer is taking a risk, however, because if you don't repay the loan, then that responsibility falls to the co-signer; so be sure that you can repay the loan when you ask someone to co-sign for you.
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