Americans are borrowing more money than ever to buy cars.
The average loan amount, not including interest, topped $35,000 for a new car and $23,000 for a used car in the second quarter of 2021, according to credit-reporting agency Experian. In total, Americans owe over $1.3 trillion on their auto loans.
These numbers may be less shocking when you consider the barrier to entry isn’t incredibly high. While a good credit score to buy a car with a loan is usually above 660, according to Experian data, there’s no industry-wide, official minimum.
As with most other types of loans, the higher the borrower’s credit score, the better the loan terms. But, it’s still possible to get an auto loan with a traditionally low credit score.
What are the different credit score tiers you can fall into?
According to Experian’s analysis of auto loans in the second quarter of 2021, borrowers who received financing for a new car had an average credit score of 732, while borrowers who received financing for a used car had an average credit score of 665.
In its analysis of auto loans, Experian separates current auto-loan borrowers into five categories based on credit scores:
- Super prime (781-850)
- Prime (661-780)
- Nonprime (601-660)
- Subprime (501-600)
- Deep subprime (300-500)
Borrowers in the subprime and deep subprime categories represent just under 18% of all borrowers in the auto-loan market, according to Experian. Meanwhile, borrowers in the top two categories, super prime and prime, represent about 65% of all borrowers.
What is a good credit score to buy a car?
Generally, the higher the credit score, the lower the interest rate. According to Experian’s second quarter data, the average interest rates on a new car loan for each category of borrower were as follows:
- Super prime (781-850) — 2.34%
- Prime (661-780) — 3.48%
- Nonprime (601-660) — 6.61%
- Subprime (501-600) — 11.03%
- Deep subprime (300-500) — 14.59%
Interest rates tend to be even higher for used car loans, reaching 17.11% for subprime borrowers and 20.58% for deep subprime borrowers.
Some auto lenders may also require a cosigner for those with lower credit scores. A cosigner is somebody with established credit who legally agrees to take responsibility of paying back the loan if the primary borrower fails to do so.
What other credit-scoring models do lenders use?
When deciding whether to extend a loan, auto lenders may use a specific Fair Issac Corporation (FICO) credit-scoring model called the FICO Auto Score. The FICO Auto Score is a variation on the general scoring model, designed specifically to predict the risk of a borrower defaulting on car payments. It ranges from 250 to 900, according to Experian.
Many auto lenders will consider more than a credit score, though. A borrower’s debt-to-income ratio, full credit history, and down payment amount will also affect the terms of the loan.
