What is the bare minimum credit score requirement to buy a car?
It is arduous to reveal the bare minimum credit score requirement to purchase a car straightaway, as every lender follows unique criteria. It is often stated that a higher credit score rating will help with qualifying for more affordable interest rates. As a matter of fact, this is not the only rudiment considered when deciding whether or not to sign off on your application. You should strengthen your overall credit profile to increase your prospects of being qualified.
What are the minimum credit points for a car loan?
There is no minimum credit score that the lending industry has set for an auto loan. The criteria banks employ to determine your affordability vary by the one that credit unions and direct lenders utilise. In fact, you will notice the criteria differ from lender to lender. Some lenders might be willing to approve your application despite a poor credit report, while others will be indisposed to give the green light even if your score is not worse. The decision a lender makes is subject to their risk tolerance capacity.
It also hinges on the credit reference agency your lender consults to fetch your past credit information. The three-digit scorer, which you call a credit rating, varies by agency due to their different mathematical formula. Sometimes, your credit file is up to snuff, and yet you struggle to avail yourself of lower interest rates because other factors such as a high debt-to-income ratio, a high credit utilisation ratio and no history of managing multiple types of loans call your credibility into question.
The implications of your credit score on a car loan
Your credit record can make it or break it when applying for an auto loan. Here are the factors that credit rating has influence on:
- The loan limit
A poor credit file is the acknowledgement of the poor behaviour in the past. Your lender will not trust your repaying capacity, which, in turn, increases the risk of losing money. In order to mitigate their risk, they will charge high interest rates, which add up the total cost of the debt, and, thereby, your lender will cap on the borrowing limit. Most lenders, in order to assuage the risk of potential defaults, restrict the lending sum. It means expensive cars are out of your league.
- A down payment
A 10% deposit is mandatory to apply for a car loan, which doubles when your credit rating is not up to scratch. It reduces the loan-to-value ratio to 80%. Bear in mind it is not set in stone that a lender would give the nod to your application if the upfront payment is 20% of the car’s value. In some cases, your lender might ask for a bigger upfront payment. It is subject to the intensity of risk involved in lending you money.
- Interest rates
Needless to mention, interest rates will be soaringly high when your credit report is abysmal. However, do not be under the impression that your chances of securing competitive interest rates are high otherwise. It is always counselled to carefully research the market as interest rates vary by lender.
- Fees
Many borrowers do not know this fact, but lenders may charge additional fees in case of a less-than-perfect credit rating.
Ways to qualify for an auto loan despite a bad credit report
There are meagre opportunities to qualify for an auto loan from a bad credit loan lender in the UK, but it does not insinuate that you are completely ineligible to have a loan sanctioned. Here are some suggestions by a few loan experts:
- Get a preapproval letter
Hard check appears on your credit file, and they will pull your credit points further. Multiple inquiries will wreak havoc on your credit score, and therefore, you will have to wait to put in the application a second time.
To avoid damaging effects of it, you should try to get a pre-qualifying letter from multiple lenders. It will help you understand interest rates and the APR you will be charged without losing credit points. A preapproval letter is just an estimation, as the actual rates will be determined after a perusal check of your overall financial condition.
- Arrange a guarantor
A guarantor with a good credit history may help you qualify for an auto loan at lower rates because your lender can call on the guarantor to pay the debt back when you refuse to settle the dues. The guarantor entering the contract lowers the risk of a lender.
Arranging a guarantor is not a cinch because a default you make also sabotages the credit rating of the guarantor as well. If that is the case, you should consider arranging a co-applicant. For instance, you can jointly take out a car loan with your spouse.
Now your lender will check the credit report of both of you. Your prospects of getting the nod for a loan are high when your spouse has a good credit rating. Remember that the lender will examine the repaying capacity of both of you because you are both completely responsible towards the obligation.
- Choose a second-hand car
Because a second-hand car is not as expensive as a new car, the loan-to-value ratio will steeply fall. As the risk involved is not that great now, you will be able to get approval for an auto loan easily.
Ways to do up your credit score
Here are the ways to ameliorate your credit rating:
- Do not run up overdrafts. They are extremely expensive and brutally damage a credit score.
- Use credit cards with utmost care. Make sure that the bills are settled on time.
- Do not close your credit card accounts if you do not use them, as they will increase the credit utilisation ratio.
- Take out 24 month loans to improve your credit score. On-time payments will be reported to credit reference agencies, and, as a result, you will see a significant improvement in your credit rating.
The final statement
There is no bare minimum credit score requirement when it comes to obtaining a car loan, but it is always suggested that the higher, the better.
Ailsa Adam is the Editor-in-Chief and former content head at Hugeloanlender. She has been a valuable member of the content strategy team since 2017 due to her abundant experience in the finance sector. Passionate about helping individuals navigate the world of loans and personal finance, she has dedicated herself to acquiring extensive knowledge on various financial products. Before her role at Hugeloanlender,
Ailsa worked as a seasoned journalist and writer, specialising in creating informative blogs and articles on diverse loan types. She is known for her meticulous research and commitment to delivering accurate and engaging content. She holds a degree in MBA Finance and has a keen interest in creative writing and art.
