What Credit Score Do Car Dealers Use to Approve Loans?

When purchasing a car, securing financing depends on a buyer’s creditworthiness. Dealerships and lenders assess various financial aspects to determine loan eligibility and terms, evaluating a borrower’s ability to repay an auto loan. Understanding these factors helps individuals navigate the car financing landscape effectively.

Credit Scores and Car Loans

Credit scores represent a borrower’s credit risk and are central to car loan approvals. Lenders use specialized scoring models like FICO Auto Scores (250-900) and VantageScore (300-850) to assess an applicant’s likelihood of repaying an auto loan on time. Higher scores indicate lower risk and lead to more favorable loan terms, including lower interest rates.

A good FICO Auto Score is generally considered 670 or higher, with scores above 720 often qualifying for the lowest rates. A VantageScore of 661 or greater is considered good for traditional car loans. While lower scores don’t disqualify an applicant, they may result in a larger down payment or higher interest rates. Lenders use these scores to predict payment likelihood, influencing annual percentage rates (APR) and other borrowing terms.

Credit Report Details Dealers Examine

Beyond the numerical score, dealerships and their lending partners examine details within a borrower’s credit report. Payment history is a key focus, revealing an applicant’s track record of paying bills on time. Late payments or delinquencies signal higher risk, impacting loan approval and terms. The types of credit accounts, such as revolving credit (e.g., credit cards) and installment loans (e.g., mortgages, student loans), also provide insight into managing different forms of debt.

Credit utilization, or the amount of debt owed, indicates whether an applicant is overextending their credit. Lenders also review the length of an applicant’s credit history; a longer history with responsible behavior is viewed favorably. New credit inquiries appear on a report, and frequent applications for different types of credit can be a concern. Public records, such as bankruptcies or repossessions, are also scrutinized, providing a complete picture of past financial challenges.

Other Factors in Car Loan Decisions

While credit scores and reports are central, other financial and personal factors influence car loan decisions. Lenders assess an applicant’s income and employment stability to ensure a steady source of repayment. They require proof of income, such as recent pay stubs or tax returns, and prefer consistent employment history, often seeking at least six months at the current job and a three-year history with no significant gaps. Self-employed individuals may need to provide business financial statements or bank records to verify income stability.

The debt-to-income (DTI) ratio is a key metric, comparing total monthly debt payments to gross monthly income. Most lenders prefer a DTI of 36% or lower, though some approve loans for applicants with a DTI up to 45-50%, especially with strong credit. A lower DTI suggests more available income for car payments, indicating better financial stability.

A larger down payment impacts loan terms by reducing the amount borrowed, lowering monthly payments, and decreasing total interest. A substantial down payment also improves approval chances, particularly for those with less-than-perfect credit. A trade-in vehicle’s value can serve as part of the down payment. The specific vehicle and desired loan term also play a role, as newer vehicles with shorter terms may be viewed as less risky.

How Dealerships Evaluate Credit

When a customer seeks financing through a car dealership, a structured process evaluates their credit. The customer typically completes a credit application, online or in person, granting the dealership permission to access their credit information. Upon consent, the dealership performs a “hard inquiry” on the customer’s credit report to obtain credit scores and detailed history. This hard inquiry can cause a small, temporary dip in the credit score, usually by a few points.

Dealerships act as intermediaries, submitting the financing application to various lenders, including banks, credit unions, and captive finance companies. This process, sometimes called “shotgunning,” allows lenders to compete, potentially leading to better rates for the buyer. Multiple inquiries for an auto loan within a concentrated period (typically 14 to 45 days) are often grouped by credit scoring models and treated as a single inquiry to minimize score impact, though it remains a hard inquiry. The dealership then presents the most suitable loan offers, aligning the buyer’s financial profile with available lenders’ criteria.