What Does Your Credit Have to Be to Buy a Car?

Understanding your credit is a foundational step when financing a car. Lenders rely on your credit profile to gauge the risk of extending a loan. This assessment directly influences loan approval and the terms you receive. A strong credit standing signals reliability, often leading to more favorable financing options.

Understanding Your Credit Score

A credit score provides a numerical snapshot of your creditworthiness, summarizing your financial history. These scores are generated by various credit scoring models, with FICO and VantageScore being prominent examples. The information used to calculate these scores is compiled by the three major credit bureaus: Equifax, Experian, and TransUnion. Lenders use these scores to predict a borrower’s repayment likelihood.

You can access your credit score through various avenues. Many credit card companies and financial institutions offer free credit score access as a benefit to their customers. Federal law also entitles you to a free copy of your credit report annually from each bureau via AnnualCreditReport.com. Reviewing these reports helps ensure accuracy and provides insight into your credit standing before applying for a loan.

Credit Score Ranges and Loan Implications

Credit scores are generally categorized into ranges, each carrying different implications for securing a car loan. While specific thresholds can vary slightly between scoring models and lenders, understanding these general categories is important. The FICO score, for instance, typically ranges from 300 to 850, with higher scores indicating lower risk. Industry-specific FICO Auto Scores, which lenders often use, range from 250 to 900.

For borrowers with excellent credit, typically FICO scores of 740-850, loan approval is highly likely, and they usually qualify for the most competitive interest rates. In the first quarter of 2025, new car buyers with excellent credit scores (781-850 VantageScore) saw average interest rates around 5.18%, while used car rates averaged 6.82%. This strong credit standing can lead to lower monthly payments and reduced overall loan costs.

Good credit, generally FICO scores between 670-739, also positions borrowers well for car loans. While the interest rates may be slightly higher than for excellent credit, they remain favorable. For example, new car buyers with prime credit (661-780 VantageScore) experienced average rates of 6.70% in early 2025, with used car rates at 9.06%. Lenders view these borrowers as reliable, offering a good balance of approval likelihood and reasonable terms.

Borrowers with fair credit, typically FICO scores from 580-669, may still secure financing, though with higher interest rates and potentially stricter terms. New car loan rates for nonprime credit (601-660 VantageScore) averaged 9.83%, and used car rates were 13.74% in the first quarter of 2025. Lenders may require a larger down payment or a shorter loan term to mitigate perceived risk.

For those with subprime credit (FICO scores 500-579) or deep subprime credit (FICO scores below 500), obtaining a car loan becomes more challenging. If approved, these loans often come with significantly higher interest rates to offset the increased risk to the lender. New car rates for subprime (501-600 VantageScore) borrowers averaged 13.22%, and deep subprime (300-500 VantageScore) rates averaged 15.81% in early 2025. Used car rates for these groups can exceed 18%. A substantial down payment, potentially 10% to 20% or more, often becomes a prerequisite for approval in these situations.

Factors Lenders Consider Beyond Your Score

While your credit score is a primary determinant, lenders evaluate several other financial aspects when assessing a car loan application. Your income and employment stability are crucial, as they demonstrate your consistent ability to make monthly loan payments. Lenders typically look for a steady employment history and sufficient income to cover the loan obligations. Some subprime lenders may require a minimum gross monthly income, often ranging from $1,500 to $2,500.

Your debt-to-income (DTI) ratio is another significant factor, representing the percentage of your gross monthly income that goes towards debt payments. Lenders use DTI to understand your existing financial commitments and assess your capacity for new debt. Most lenders prefer a DTI ratio below 46%, although some may approve loans with a DTI up to 50%. A DTI of 35% or less indicates a manageable debt load and can lead to more favorable loan terms.

A down payment also plays a considerable role in loan approval and terms. Providing a larger down payment reduces the amount you need to borrow, thereby decreasing the lender’s risk. Financial experts frequently recommend a down payment of at least 20% for new cars and 10% for used cars, which can lead to lower monthly payments and better interest rates. Even a smaller down payment, however, can improve your chances of securing an auto loan and help you avoid owing more than the car’s value early in the loan term.

The loan-to-value (LTV) ratio, which compares the loan amount to the car’s value, also influences a lender’s decision. A lower LTV, often achieved with a larger down payment, indicates less risk. The age and mileage of the vehicle can also impact loan terms, as older or high-mileage cars may be perceived as higher risk collateral due to potential depreciation or maintenance issues.

Strategies for Securing a Car Loan

To improve your chances of securing a favorable car loan, several proactive steps can be taken:
Regularly check your credit report from each of the three major bureaus for accuracy. Addressing any errors found on your credit report can positively impact your score.
Focus on improving your credit by consistently paying all bills on time and reducing existing debt, particularly high-interest credit card balances.
Maintaining low credit utilization, ideally using less than 30% of your available credit, also signals responsible credit management to lenders. These actions can gradually strengthen your credit profile over time.
Consider getting pre-approved for a car loan before visiting a dealership. Pre-approval provides you with a clear understanding of the interest rate and loan amount you qualify for, empowering you to negotiate more effectively.
Shopping around for lenders, including banks, credit unions, and online lenders, allows you to compare multiple offers and secure the most competitive interest rate.
If your credit score is lower, consider making a larger down payment, ideally 10% to 20% of the vehicle’s price, as this reduces the loan amount and the lender’s risk.
A co-signer with strong credit can also enhance your application, as their creditworthiness provides additional assurance to the lender.
Finally, setting a realistic budget for the car and its associated costs ensures that any loan you secure is financially manageable.