What Credit Score Do Auto Lenders Use?
Unpack the complex credit assessment process auto lenders use to approve car loans and how your financial history impacts their decision.
Credit scores play a role in securing an auto loan. Lenders use these numerical summaries to assess a borrower’s likelihood of repaying debt. A higher score indicates lower risk to the lender, which can translate into more favorable loan terms and interest rates. Understanding how these scores are calculated and what factors influence them provides insight into obtaining vehicle financing.
Different Credit Scores for Auto Loans
Auto lenders do not rely on a single, universal credit score. They often use specialized versions tailored to predict auto loan default. These industry-specific scores provide a nuanced assessment for vehicle financing.
FICO Auto Scores are prominent in auto lending, designed to weigh factors predictive of auto loan repayment. These scores range from 250 to 900, a broader scale than general FICO scores. Various versions of FICO Auto Scores exist, used by different credit bureaus.
VantageScore is another credit scoring model, ranging from 300 to 850. While some auto lenders use VantageScore, FICO Auto Scores are more prevalent for auto loan decisions. Lenders may also refer to a borrower’s general FICO Score, such as FICO Score 8 or 9, which also range from 300 to 850. Lenders pull credit scores from Equifax, Experian, and TransUnion, and a borrower’s score can vary slightly between these bureaus.
Factors Affecting Your Auto Loan Credit Score
Credit scores are derived from data points within an individual’s credit report. The most impactful factor is payment history, reflecting a borrower’s on-time payments on all past and current debts. Consistent on-time payments demonstrate reliability, while bankruptcies, repossessions, or collection accounts can lower a score.
Credit utilization, the amount of credit used relative to total available credit, also plays a role. High utilization rates can indicate financial stress to lenders. A longer credit history leads to higher scores.
The mix of credit types shows a borrower’s ability to manage different forms of debt. New credit and recent credit inquiries can influence scores. Multiple inquiries for auto loans within a short timeframe are treated as a single inquiry. Opening several new accounts concurrently can temporarily lower a score.
Other Elements Auto Lenders Consider
While credit scores are a primary indicator, auto lenders assess various other factors to gain a complete picture of a borrower’s financial capacity. These additional considerations help lenders determine overall repayment ability and risk. A borrower’s income and employment stability are closely examined, as lenders verify consistent earnings and a steady job history to ensure the capacity to repay the loan. Lenders prefer to see at least two years of stable employment.
The debt-to-income (DTI) ratio is another important metric, calculated by comparing monthly debt payments to gross monthly income. This ratio helps lenders determine if a borrower can comfortably take on additional debt. Lenders prefer DTI ratios below 43% to 45%. Making a larger down payment on a vehicle reduces the loan amount and the lender’s financial risk, which can lead to more favorable loan terms or approval.
The vehicle itself also factors into the loan decision, as it serves as collateral for the loan. Newer vehicles present lower risk due to higher resale values, leading to better loan terms compared to older, used vehicles. For applicants with limited credit history or lower scores, including a co-signer on the loan can improve the chances of approval and secure more attractive interest rates.
Understanding Your Credit Reports
Accessing and reviewing credit reports is an important step in preparing for an auto loan, as they contain the detailed financial history that feeds into credit scores. Individuals are entitled to a free copy of their credit report once every 12 months from each of the three major credit bureaus: Equifax, Experian, and TransUnion. These reports can be obtained through AnnualCreditReport.com.
Upon receiving a credit report, review it for accuracy. Verify personal information, ensure all accounts listed belong to you, and check for errors, fraudulent activity, or outdated negative information. If an error is found, dispute it directly with the credit bureau that reported the information.
The dispute process involves submitting a written explanation of the inaccuracy. Credit bureaus have 30 days to investigate a dispute and report their findings. Correcting errors on a credit report can lead to an improvement in credit scores, potentially leading to better auto loan offers.