What Credit Do You Need to Finance a Car?
Navigate car financing by understanding credit requirements, loan factors, and the application process for better terms.
Financing a vehicle often depends on a borrower’s creditworthiness. Lenders assess various financial details to determine eligibility and set the terms of a car loan. Understanding these requirements helps individuals prepare for the financing process. This article aims to clarify the credit requirements for car financing for the general public.
Understanding Credit Scores for Car Financing
Credit scores serve as a numerical representation of an individual’s financial reliability. FICO and VantageScore, both typically ranging from 300 to 850, are widely used by lenders to assess credit risk.
Lenders categorize credit scores into ranges, which directly influence loan terms. As of the first quarter of 2025, Experian data using the VantageScore model shows Superprime scores are 781-850, Prime are 661-780, Nonprime are 601-660, Subprime are 501-600, and Deep Subprime are 300-500. For FICO, a score of 670 or higher is generally considered good.
The interest rate on a car loan varies significantly based on credit scores. In the first quarter of 2025, new car loan rates ranged from an average of 5.18% for Superprime borrowers to 15.81% for Deep Subprime borrowers. For used cars, the average rates ranged from 6.82% for Superprime to 21.58% for Deep Subprime.
Several factors contribute to the calculation of a credit score. Payment history, indicating whether past debts have been paid on time, accounts for approximately 35% of a FICO Score. The amounts owed, or credit utilization, make up about 30%, reflecting the proportion of available credit being used. The length of one’s credit history, new credit inquiries, and the mix of different credit types also play a role in the overall score.
Additional Factors for Car Loan Approval
Beyond the credit score, lenders evaluate other financial aspects to determine loan approval and terms. A borrower’s income and employment stability provide assurance of their capacity to repay the loan. Lenders typically prefer a consistent income and at least two years of stable employment.
The debt-to-income (DTI) ratio is another important metric. This ratio compares an individual’s total monthly debt payments to their gross monthly income. Lenders use DTI to assess how much existing debt a borrower has relative to their earnings. While specific thresholds vary, lenders generally prefer a DTI below 43-46%, though some may accept up to 50% for car loans.
Making a down payment also influences loan approval and terms. A down payment reduces the total amount borrowed, thereby lowering the loan-to-value (LTV) ratio. A lower LTV ratio, which compares the loan amount to the vehicle’s value, indicates less risk for the lender.
For applicants with less-than-ideal credit or limited credit history, a co-signer can significantly improve approval chances. A co-signer agrees to be legally responsible for the loan if the primary borrower is unable to make payments. The co-signer’s strong credit profile, income, and debt-to-income ratio are also assessed, potentially leading to loan approval or better interest rates.
Preparing for Car Loan Application
Before formally applying for a car loan, it is advisable to review one’s credit information. Individuals can obtain a free copy of their credit report weekly from each of the three major nationwide credit reporting companies—Equifax, Experian, and TransUnion—through AnnualCreditReport.com. This allows for a thorough check of the report for any inaccuracies.
If errors are identified on a credit report, it is important to dispute them. The process involves contacting the credit reporting company (or companies) in writing, explaining the perceived error, and including copies of supporting documents. The credit bureaus typically have 30 days to investigate the dispute and respond.
Saving for a substantial down payment is another preparatory step. A larger down payment can reduce the amount needing to be financed and may lead to better loan terms. Additionally, gathering necessary financial documents in advance streamlines the application process. Common documents include proof of identity like a driver’s license, recent pay stubs or bank statements for income verification, and utility bills or mortgage statements for proof of residency.
Navigating the Car Loan Application Process
Once preparations are complete, beginning the application process with pre-approval can provide a clear financial outlook. Seeking pre-approval from banks or credit unions before visiting a dealership offers several advantages. A pre-approval specifies the maximum loan amount, estimated interest rate, and terms for which a borrower qualifies.
Having a pre-approval in hand also strengthens a buyer’s negotiating position at the dealership. It allows for comparing the pre-approved offer with any financing options provided by the dealership. When comparing offers, it is essential to focus on the Annual Percentage Rate (APR), which represents the total annual cost of borrowing, including both the interest rate and certain fees.
Completing the loan application involves providing all gathered financial and personal information. With documents already prepared, this step becomes more efficient. Lenders will review the details, including credit score, income, and debt-to-income ratio, to make a final decision.
Upon approval, it is important to carefully review the final loan agreement. This agreement outlines the annual percentage rate (APR), the loan term (e.g., 36, 48, 60, or 72 months), and any associated fees. Finalizing the loan involves signing the necessary documents and arranging for the disbursement of funds.