An auto loan is perfect for buying your dream car or bike if you have a stable income and can repay the debt promptly. But as with other loans, auto loans also require your credit scores. And a poor credit score will only make things difficult for you when you apply for auto loans.
The short answer is you can get auto loans with just any credit score, but the approval chances and terms depend on how good your credit scores are. Also, there are widely used credit models that lenders use to analyze your credit situation before approving your loan. In this guide, I will cover a few basics on understanding credit scores for auto loans, factors affecting them, and strategies to improve credit scores for better auto loans. Most of these things are available in my ultimate self-credit repair guide – Space Shuttle Strategy, which helps users improve their scores and get into a better credit profile. So, do check it out once.
Auto Loans – Understanding Them From the Credit Scores Point of View
As I mentioned before, you can get auto loans with just any credit score, but there is a catch in this statement. If your credit scores are high, the chances are you get faster approval of credit scores at a better interest rate and longer period. But if your credit scores are not that good, the chances of getting an auto loan are less, and if you manage to secure one, you will either have a higher interest rate or difficult terms and conditions. In the worst cases, you can have both of them.
But what credit scores do lenders use? It has been a debatable concept what credit scores lenders use to analyze your credit situation. But most commonly, FICO Scores are widely used, and most lenders prefer using these credit scores. Other lenders might use credit scores like VantageScore, which is a relatively new credit score model and is yet to gain popularity.
You can check your FICO scores from myFICO, a credit monitoring service, and there are almost 30 kinds of FICO scores for multiple use cases. The FICO Score 8 and FICO Score 9 are the most basic templates to get an overall idea of your creditworthiness. FICO also has a dedicated score for auto loans, known as FICO Auto Score; this score considers your past loan activity for auto loans and how easy it was for you to repay on time.
These credit scores help lenders get an idea about your creditworthiness, and based on this data, the terms, interest rates, and approval chances for your auto loans are determined.
myFICO Credit Score Monitoring
You can learn more about FICO Scores from our handy guides below,
Can you Get an Auto Loan with Bad Credit?
It is possible to get an auto loan with a bad credit profile or credit score, but again, the terms and interest rates are a lot different from what consumers with high credit scores enjoy. This is because lenders look at poor credit profiles or scores as a sign of high risk, and in some cases, a lot of lenders also deny auto loans for bad credit scores.
Instead of paying hundreds of dollars extra for the same loan enjoyed by a high credit profile, the better approach can be to build a credit profile first. In this case, you first improve your credit scores to at least fall in the range of 650-739 and then apply for the auto loan.
There are a lot of ways to improve credit scores; for instance, timely payments of your current credits, adding a good authorized user to your credit profile or disputing negative items from your credit report. You can learn about these in our broader guide, the Space Shuttle Strategy.
More about improving your credit scores, specifically for auto loans, in the later section of this guide.
Factors Affecting Your Auto Loans
There are a lot of factors that commonly affect auto loans, and no, credit scores are not the only ones.
Three factors along with the credit scores influence your auto loans,
- Economic based factors
- Loan specific factors
- Demographic factors
Economic factors are the ones that widely influence auto loans; in most cases, it is rising inflation that leads consumers to an average credit score. Which, in turn, makes it harder to secure products such as auto loans, mortgages, and more. In addition, the rising unemployment and booming interest rates make things more difficult for consumers to avail of such loans for their lifestyle and needs.
Loan-specific factors such as loan-to-value ratio, down payments, and type of vehicle financed influence auto loans. If your credit score is below average, it is likely that you will have higher interest rates and bigger down payments, which only worsens the situation.
There are also demographic factors that influence your auto loans, such as the region from where you are scoring an auto loan. If it is a tier-one city, the interest rates on these auto loans can be higher, even if you have an average or good credit score.
Strategies to Improve Credit Scores for Better Auto Loans
Here are some quick strategies you can imply to improve your credit scores for better auto loans,
1. Build Credit for Lower Interest Rates
The prime factor is to build your credit profile for better or lower interest rates. This can be done using timely repayments, responsible credit behavior, and maintaining long credit history. Most of the methods that work in improving credit scores are mentioned in the Space Shuttle Strategy Credit Repair Guide. You can give a quick run-through and try implementing them to build a better credit profile.
Once you build a credit profile, getting auto loans becomes a lot easier and also overall improves your credit profile to get more options. You can then research various lenders and apply for the loan with acceptable interest rates and other terms and not the other way around.
2. Improve Scores by Disputing Anomaly in Previous Auto Loans
After analyzing your credit reports from all three bureaus, if you specifically find a negative item or an anomaly, go with disputing with enough evidence. These negative items can be incorrect entries, misspelled names, unidentified accounts, or anything else that you can prove to be not yours.
You can dispute such entries with credit bureaus by filing a dispute letter, and if there are several such entries, you can also use credit repair software like DisputeBee. This software allows you to generate dispute letters in bulk and track them in an organizational way.
You can skip buying any course on how you can create dispute letters; if you know the format and have enough evidence, your letter will just work fine. Remember, often, dispute letters don’t work in the first go, so you will have to resend them a couple of times before you can actually see the result.
Credit Repair Cloud is also an alternative credit repair software that lets you create dispute letters and also automates the process by sending the letters on your behalf.
3. Add an Authorized User to your Credit Report
Adding an authorized user to your credit report will give your credit score an instant boost. But it comes with a condition, the person you are adding should have a good credit score.
In this process, your credit reports are merged, and you can see an instant boost in your credit scores. If you are falling short of a few points to get a good auto loan, this is one of the best ways to get faster credit scores.
One of the best-authorized users to add to your credit report can be your spouse. But if your spouse or the person you are adding as an authorized user does not have a good credit score, your credit profile may not see impactful changes and, in worst cases, dip a little more.
Frequently Asked Questions [FAQs] on Auto Loan Credit Scores
Yes, it is possible to get an auto loan with just any credit score. However, with lower credit scores, you might find higher interest rates and difficult terms.
Using a credit score is an independent choice, but you can assume a few things, such as FICO is a widely used credit score model, and FICO 8 and FICO 9 give a base understanding of your credit situation. There is also an auto loan-specific FICO score, FICO Auto Score, which is included in a few of the 30 types of FICO credit score models.
Economic, loan-specific, and demographic factors can influence auto loans and the terms that come along. Inflation, regional growth, and loan-to-value ratio are some of the prominent key points of these factors.
Rebuilding your credit scores, disputing anomalies, and adding authorized users with good credit scores can help you ease auto loans. However, most of these strategies are time taking, such as maintaining long credit history and showing responsible credit behavior.
Anomalies or negative items can be disputed by filing a dispute letter with evidence to the respective credit bureaus. Dispute letters often take time and do not get through the first try in most cases. You will need to attach solid evidence and resend them a few times.
Wrapping up: Credit Scores for Auto Loans
This pretty much wraps up the basics of what credit scores are suitable for auto loans and how you can get a better auto loan. If you have a good credit score, always research your loan options, as you may get a better interest rate than what the lender has to offer. For those with low credit scores, it is best to build your credit profile first to boost your scores and then apply for a loan. This can potentially save hundreds of dollars each month.