Q: What credit score is needed to get a car loan? What are the best options in your opinion? Any help would be appreciated.
Thank you so much.
A: Even though the economy is seeing a mild recovery, credit is still tight which means it may be difficult to find a low interest rate car loan unless your credit score is above average. Use this chart to see how your credit score compares:
700 + Excellent
680 to 699 Good
620 to 679 Average
580 to 619 Low
500 to 579 Bad
As a general rule, if your credit score is 650 or higher you can expect more favorable lending terms which may include lower interest rates, longer terms and fewer prepayment penalties. If your credit score is above 700 you should be eligible for all incentives, rebates and special offers that may be available. You are seen as a low risk customer in the eyes of lenders as your credit score exceeds 700.
I recommend trying to obtain a car loan from your current bank, credit union or mortgage provider. Compare the rates offered by each company and select the one with the lowest interest rate. You’ll find that companies are willing to extend more favorable loans if you’re already doing business with them. This is because they can see first-hand what kind of customer you are without having to rely solely on your credit report. They’re also afraid of losing your business to their competitors which increases your bargaining power. Obtaining a loan through the car dealership should be your last resort unless they are offering special 0% financing or an interest rate lower than 6%.
A “good rate” for a car loan today is anything less than 6% for a new car or a used car with low miles. Keep in mind your interest rate will depend, to some degree, on the length of your loan. You can expect to pay a lower interest rate for a shorter loan (36 months or less) and a higher interest for a longer loan.
Matthew Brandeburg, CFP® has six years of financial planning experience and runs his own business, Bridgeway Financial Group, LLC, based in Columbus, OH.