When it comes to financing an auto loan, it’s a good idea to know where your credit stands before you even consider looking for a lender. This is because your credit score, and the information on your credit reports, helps determine what kind of a loan you qualify for.
Credit Scores for an Auto Loan
There are three basic categories borrowers can fall into: prime, subprime, or deep subprime. This same breakdown, scoring model, and category range applies to all loan types. However, the process varies by lender within each loan type.
The categories – prime, subprime, and deep subprime – typically have to do with where your credit score lands on the FICO credit score range, from 300 to 850. FICO scores aren’t the only scoring model available, but they're the most widely used scores among auto lenders. As a borrower, it’s important to understand both your credit score and what's on your credit reports.
According to myFICO.com here’s how the scores break down:
- 750 and up – Excellent
- 700 to 749 – Good
- 650 to 699 – Fair
- 550 to 649 – Poor
- 549 and below – Bad
How these numbers fall into the prime/subprime categories varies by lender. To give you a good idea of where your credit stands, you can get your credit score from a number of sources, which allows you to be a more informed and prepared car buyer. Typically, anyone with a credit score of 700 or higher can be considered prime, while anyone with a score between 640 and 501 falls into the subprime category. Below 500, and you’re in deep subprime territory.
Need to Improve Your Credit Before Getting a Car Loan?
When you fall into the subprime category, you may need to work on building your credit before you qualify for the type of financing you want. This doesn’t mean you can’t get an auto loan, but any loan you do qualify for likely comes with a high interest rate, a down payment requirement, and possibly the need for a cosigner.
Fortunately, it typically isn’t difficult to build credit. There are many simple things you can do to help improve your credit over time. These things don’t take a lot of energy, but they might require you to get better at budgeting.
The Four Best Ways to Build Credit
Here are the four most basic steps you can take to improve your credit:
- Start paying your bills on time, every time. The easiest way to improve your credit is to pay your bills on time and in full every month. The longer you can do this, the better. Your positive payment history impacts your credit reports and scores. Payment history accounts for 35 percent of your FICO credit score, which lenders use when you apply for a loan.
- Get a secured credit card. Secured credit cards work just like unsecured cards, but you make an initial deposit which becomes your credit limit. For example: if you get a secured Visa card and deposit $500, you now have a Visa with a $500 limit. From there, you can use the card, make on-time payments, and begin to see an improvement in your credit in just a few short months. Another tip: when it comes to credit cards, secured or not, keep your balances as low as possible. Lenders look more favorably if your credit utilization is below 30 percent.
- Become an authorized user on someone’s credit card. Becoming an authorized user gives you the benefits of building credit, without the headache of paying the bills. This can be a good way to build credit as a young adult, or an adult. As the credit card subscriber uses their card and pays their bills on time, your credit improves right along with theirs. In some cases, authorized users are provided with their own copy of the credit card, so make sure you have an agreement with the cardholder before you run out thinking it’s free money.
- Get a car loan. A car loan can be an excellent tool for building credit. In order for it to help, the loan and payments have to be reported to the credit bureaus, and you have to make all your monthly payments on time and in full. Because a car loan is such a large use of your credit, being responsible with one really makes an impact. It won’t happen overnight, but over the term of your loan – assuming you’re keeping up with your other monthly payments – you should see the impact. How much your score improves reflects the effort you’re putting into credit building.
Won’t Bad Credit Stop Me From Getting a Car Loan?
Not always. In fact, there’s a whole network of lenders that are willing to work with people who struggle with credit issues, often referred to as subprime or special financing dealers and lenders. Working with one of these subprime dealerships can be a great opportunity to build your credit with a car loan, so next time around you won’t need special financing.
The catch is that these lenders only operate through special finance dealers. Since these dealerships don’t always shout from the rooftops that they can help with credit-challenged buyers, how do you go about finding a lender for your bad credit situation?
That’s where The Car Connection comes in. We work with a nationwide network of special finance dealers that have the lending resources you need. Getting the process started is easy. Simply fill out our no-obligation, secure online auto loan request form today, and we’ll get to work matching you with a local dealership.