Your Credit Score
A credit score is a numerical value assigned to an individual’s creditworthiness. It is used as a measure of how likely the individual is to repay borrowed money.
The score is calculated based on information from the consumer’s credit history, such as payment history, length of credit history, types of credit used and recent changes in debt levels. Credit scores are used by lenders to decide whether or not to grant loans, in this case an auto loan.
Improving Your Credit Score
There are many factors that affect your credit score, such as the amount of debt you have, your payment history and even your employment history. In order to improve your credit score, you need to pay off as much revolving credit debt as you can, keep up with payments and make sure that you don’t have any negative information on your report.
This might be an over simplification of your credit score, but it really is a simple number to manipulate, it just takes time and discipline. But, what if you do not have time? What is the lowest credit score you can have to finance a car?
Minimum Score To Finance
Most people will be able to finance a car at a dealership with a credit score as low as 580. This is assuming that you have some references and a steady source of income.
Should You Finance At 580?
580 is a pretty low credit score, but you might be relieved to know that you can still buy a car on finance with a score this low, in most cases. The real question however is, should you finance a car with a 580 credit score?
The answer is no. Unless you absolutely can not live without a vehicle immediately, you would be better off working on your credit score before you apply for a loan. This is because the terms on a loan with such a low credit score would be awful.
Your interest rate would likely be well over 20 percent and you would be subject to numerous high fees, such as late fees and possibly even a loan origination fee.
When Should You Finance?
So, what score should you have in order to finance a vehicle?
620. This is the lowest credit score that you should try to finance a vehicle with and expect to get reasonable terms.
With this score, you would be considered a fair credit risk and will be able to secure a better rate. It will still be higher than someone with perfect credit would get, but you should still be able to qualify for high single digit financing.
A Word Of Caution
Even with a score of 620, you need to be careful when dealing with a dealer finance department. The score is not the lowest credit score you need to buy a car, but you will still be considered someone with credit problems.
A dealer may, and likely will, use this information to try to get you to agree to a higher interest rate. They will take the rate that they get from a bank and add a few percentage points on the top. That is pure profit for them and a common tactic used by dealers to improve the bottom line.
Before you go to finance a vehicle, get pre-approved from an external bank or credit union. You can still use the dealer finance department, but getting a pre-approval will help you understand what rate you truly qualify for. Then, when the dealer tries to add a few percentage points to the interest rate, you will be prepared to catch them.
Financing Alternatives When You Need A Car
So, what happens if you need a car, but do not have at least a 580 credit score? Here are a few op your options.
Buy Here Pay Here
If you have to have transportation immediately, one option is a buy here pay here auto dealership. The rates will be high, there will be limited choices on vehicles and the vehicle prices will be inflated, but desperate times call for desperate measures.
Should you decide to go this route, buy as cheap of a car as you can. With high interest rates, the less you borrow, the less you will be charged in interest. You can then take any extra money you have and start working on your credit. Then, just as soon as your credit rating improves, you can get out from under that buy here pay here car.
Buy A Cash Car
If you can scrape together a 2000 to 3000 dollars, you can consider a cash car as an option to financing. When your credit rating is bad, you would be better off taking down payment money and buying a car outright, even if it is not the perfect car for you.
Buying a cash car for a few thousand dollars does have some drawbacks however. The main one is the lack of choices. You should be shopping for lower mileage vehicles in your price range, not a specific vehicle. You really have to be willing to accept any car as long as it is in good mechanical shape.
Work On Your Credit
One last option, if you can afford to wait for a vehicle, is to simply work on your credit score. It really is a simple number to manipulate, if you have time and discipline. Here is what you need to do.
Pay your bills on time. This is the number one factor in your credit rating, so use automatic bill pay and reminders to make sure the bills get paid.
Reduce credit card debt. The higher percentage of your credit you use, the worse your score will be. Your ultimate goal should be using less than 10 percent of your available credit.
Stay the course. Credit ratings take time to increase, but you could start seeing positive changes to your score in as little as 3 months.
