Nervous that your credit score isn’t up to par for that new Audi you’ve had an eye on lately? Luckily, even if your credit score is poor, there are still options. Believe it or not, the majority of Americans purchasing a vehicle costing $40,000 or more will go down the loan route. And surprisingly, your credit score may not have to be as high as you think it does.
Auto lenders will take a look at both your income and your credit score. Your credit score is the starting point to see if you qualify and what the interest rate will need to be set at. The lender will also take a look at your income and your debt-to-income ratio. This is used to determine if you’ll be able to afford the monthly payments.
So what does a good and bad credit score look like? The average credit score for borrowers in 2019 was 716 according to Experian. Credit scores are separated into five categories; super-prime, prime, nonprime, subprime, and deep subprime. Deep subprime sits at 300-500, subprime sits at 501-600, nonprime is 601-660, prime is 661-780, and superprime is 781-850. A majority of the borrowers are typically in the prime to super-prime categories. In other words, for most conventional car loans, you’ll need at least a 661 or higher. However, if this is not the case for you, you may still have a chance.
Perhaps you’re a little under 661. Or maybe way under 661. If this is the case, your income will play a huge role here. It’s possible that you may still qualify for other options. Unfortunately, it may be more difficult to find and maybe more expensive. One of those options is the willingness to pay a higher interest rate. Because of your poor score, you will look like a risk to lenders. The average interest rate in 2020 was 4.21% for prime borrowers, while for deep subprime borrowers it was 13.97%. The lower the score, the higher the interest rate. You may also choose to put down a larger down payment. Making a big down payment will reduce your future monthly payments and your interest rate. This will result in a shorter auto loan term.
Another option is choosing to go to a dealer that specializes in buyers with poor credit. They offer in-house financing for used cars. A final option would be to sign with a cosigner. This individual would ideally have an excellent to good credit score to balance out your poor fico score. They share responsibility with the loan and if you’re unable to make payments, they’ll need to pick up the slack and pay the bill on time.
There will be a difference if you’re looking for a new car over a used one. Buying a used car with a higher interest rate will still save you more than a new car with a lower rate. New cars depreciate the minute you drive off the lot so a used vehicle is typically a better financial decision. It’s also important to note that a loan is superior to a lease. With a lease, you’re essentially renting it temporarily. However, with an auto loan, you will actually own the car eventually and then have the choice to sell it or keep it for however long you please.
Whether you’ve got an excellent credit history or you need to improve your credit score, there’s always hope. If you’re unsure if you’ll qualify with a traditional dealership, you can opt for a “buy here, pay here” dealership. However, just know that you may be looking at some sky-high interest rates. Maybe increasing your fico auto score is something you’ll want to work on before taking the leap. Either way, there are always options when it comes to mapping out a plan for your next vehicle.