While there’s no set minimum credit score for a car loan, having a poor credit score can increase the interest rate you’ll pay, increasing the amount of car debt you take on. If you can’t pay the full price of the car upfront, you’ll need to apply for a car loan. Lenders use your credit scores to determine if you’re eligible for financing. Credit scores help lenders assess your current financial situation to determine how to structure your loan.

If you can, take some time to improve your credit score through on-time payments and by paying down your debts before you apply for the loan to secure better terms.

What Credit Score Do You Need for a Car Loan?

There’s no set minimum credit score to get a car loan. Each lender will have its own criteria, and getting a loan with credit scores as low as 500 is possible. However, the higher your credit score, the better your chances of getting approval at a competitive interest rate.

Having a better credit history also makes it easier to qualify for a loan. For example, in Q3 2023, 69% of all cars financed were for those with credit scores of 661 or higher. Only 2% of all loans were for borrowers with a credit score below 500.

What Is a Good Credit Score for a Car Loan?

While each lender will have their own requirements, a good credit score for a car loan is 661 or higher if you want competitive interest rates. “Prime borrowers” (with a credit score of 661 to 780) secured an average auto loan interest rate of 6.88% for a new car and 9.33% for a used car loan in Q3 2023.

How Credit Score Impacts Car Loans

Your credit score plays an important role in determining if you qualify for a loan and the interest rate you’ll pay. When you get a car loan with bad credit, you may qualify for a higher interest rate. This can make it more difficult for you to pay off the loan.

“If you have to finance a car, make sure you have a good to great credit score,” shares Teresa Dodson, a financial expert and the founder of Greenbacks Consulting. “Otherwise, you may overpay for the car and end up upside down on the loan,” she adds. 

Higher interest rates will also impact your monthly car loan payments. Your monthly payments can be much higher with a high interest rate. For example, if you’re borrowing a loan of $20,000 for 60 months at an interest rate of 6.88%, your monthly payment will be $395.

For the same loan, if the interest rate you qualify for is 11.86%, your monthly payment will be $444. This means that you’ll pay an extra $2,940 over the life of the loan for the same car.

How Do Lenders Use Credit Score?

Lenders will use your credit score to determine your risk as a borrower. A credit check helps them determine whether you’re likely to repay the car loan. Other than your FICO credit score and VantageScore, lenders may also use FICO auto scores, which is a credit scoring model specifically for the automotive finance market.

FICO auto scores take into account past car payment history, auto loan bankruptcies, and repossessions. If you’ve had any payment issues on past car loans, it may make it difficult to get approved.

Eligibility

One of the most important reasons why lenders check your credit score before providing pre-approval for an auto loan is to determine your eligibility. Many auto loan lenders will have a minimum credit score requirement, and your credit score will allow them to determine whether you satisfy that requirement.

Interest Rates and Payment Terms

Your credit score for a car loan will also determine the interest rates you’ll pay. Financial institutions determine their risk in lending you money based on your credit score range. The lower your credit score, the higher your risk.

Lenders compensate for the risk they’re taking on by charging a higher interest rate for riskier borrowers.

Where To Check Your Credit Score

We recommend checking your credit score before you apply for a new car loan. You can get a free credit report from all three major credit bureaus (Experian, Equifax, and TransUnion) from AnnualCreditReport.com.

Check your credit report to ensure that all information on file is accurate. Errors and incorrect information can lower your credit score, so it's important to check carefully and dispute any errors.

How To Improve Your Credit Score

If you don’t have a good score for a car loan, we recommend taking steps to improve it before you apply for a loan. Having the right credit mix and paying down your debts can help improve your score. Even an improvement of 50 points can help you access better loan options.

Make Timely Payments

One of the most effective ways to raise your credit score is by paying all your bills on time. Missed payments can lower your score and can result in costly fees and penalties. Making on-time payments can be as simple as setting up autopay or setting a reminder on your phone so you don’t forget important due dates.

Track Your Credit Utilization Ratio

If you carry high balances on your accounts, it may lower your credit score. Try to pay down credit card debt to bring your credit utilization ratio under 30%. This can greatly help improve your credit score.

If you have more than one credit card and personal loans, consider taking out a debt consolidation loan to make it easier to pay down your debt.

Request Credit Limit Increases

Another way to lower your credit utilization ratio and increase your credit score is by getting in touch with your lenders and requesting credit limit increases. With increased credit limits, your credit utilization ratio will be lower even if you don’t pay down your debts.

Keep in mind, though, that if you want to qualify for a car loan, don’t use up the increased credit limit for purchases because it’ll make it difficult for you to manage your monthly payments along with high-interest credit card debt. Other than the credit score, lenders also check your debt-to-income ratio to determine your eligibility.

Where To Get a Car Loan With a Low Credit Score

While it’s ideal to wait until you have a good credit score for a car loan, it’s still possible to get approved with poor credit. The best way to get the best possible car loan rates with poor credit is by speaking with different lenders.

You may be able to get approved for a loan from car dealerships, online lenders, or banks. If you have an existing relationship with a credit union, it may be easier to get a car loan even with a lower credit score. Another option is to apply with a co-signer to qualify for better loan terms.  

Buy-here, pay-here dealerships are the last resort for those wanting to buy a car. These dealerships offer their own financing for borrowers with no or low credit history. However, the interest rates they charge are much higher. If you can wait, work on improving your credit score and save a larger down payment before you buy a new vehicle.