What is a good credit score to buy a car?

No matter your credit score, someone will be willing to lend you money for a car.

While some lenders may deny you based on your credit, rest assured others will be happy to give you a loan — at least for the right price.

The riskier you are as a borrower, the more interest you’ll pay. And, you will have to jump through more hoops to be approved.

To avoid the worst hassles, you’ll need to make yourself less risky to lenders.

Lenders start to offer better interest rates once your score breaks 600. If you don't know your current credit score, you can check it online for free.

For the lowest rates, you should aim for a score of 725 or higher.

And, if 725 feels light-years away, take comfort in knowing most car buyers don't quite fall into this category.

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What if I have a score lower than 700?

You can still get a car loan with a score lower than 700 but there will be questions.

A lender will likely grill you about the negative marks on your credit report. This may seem intimidating, but it’s actually an opportunity to plead your case.

Frame your explanation in a way that shows:

  • You’ve learned from your mistakes.
  • You are working hard to fix them.
  • They won’t happen again.

You can also use this opportunity to highlight any positive aspects of your credit report.

You may be asked to bring in a co-signer

If you have poor credit, you can increase your odds of approval (and even get better rates) by recruiting a co-signer.

A co-signer lessens the lender’s risk — if you fail to repay your loan, your co-signer will be responsible.

Still, this can be a big favour to ask. If you screw up, you could damage the co-signer's finances (and potentially your relationship with them).

Lastly, remember not all car dealers are created equal. Some are more accommodating than others, so if one denies you, move on to the next.

Try improving your score

Instead of using a co-signer or accepting outrageous interest rates, you’re often better off taking the time to build your credit score.

Your wallet will thank you for it.

Here are some credit-boosting tips to get you started.

Get your score for free

The first step to building your score is knowing where you currently stand. Here’s how to check your credit score for free.

Keep in mind that your auto lender may check your score using a slightly different scoring model that puts a heavier emphasis on your past auto-loan payment history.

You can purchase an auto-specific report for yourself, but it’s not necessary. As long as you improve your base credit score, you’ll start qualifying for better rates.

Credit bureaus keep a range of information, including whether or not you make timely payments.

How long credit bureaus keep information in your report depends on several factors, including the province or territory where you live, the type of financial information and the bureau that created the report.

Use a secured credit card

Using credit cards to build a reliable payment history is one of the easiest ways to improve your credit score. The problem is, if you have poor credit, it can be difficult to be approved for a credit card in the first place.

That’s where secured credit cards come in.

They are designed to help riskier borrowers prove themselves and build credit. The catch is you’ll have to provide a security deposit that the issuer will take if you don’t pay your bills.

A car loan will also help your score

Once you are finally approved for a car loan, you can leverage it to build your score even more.

The biggest influence on your credit score is payment history. When you make your car payment on time every month, your lender will report it to the major credit bureaus (so don’t be late).

Car loans also boost your score by helping with your credit mix. If the only type of credit you currently have is credit cards (i.e. revolving credit), adding an installment loan will help improve your score.

As you continue to strengthen your credit, it may make sense to refinance your auto loan in the future when you qualify for better rates.

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Waiting isn’t a bad idea

Waiting to take out an auto loan allows you to:

  • Hunt for better deals and discounts.
  • Spend time building your credit score.
  • Build up a history of on-time bill payments.
  • Save more money for a down payment.

All these actions will help you secure a more affordable loan.

While you are waiting, avoid applying for any other forms of credit. If hard inquiries are made on your account, your score will take a temporary hit.

Lastly, when the day comes to buy your ride, go for a used car, keep the financing term to a maximum of four years, and put down as big of a down payment as possible (shoot for 25% or more).

This will minimize interest payments and help you avoid negative equity (owing more than the car is worth).

What you will need to close the auto loan

There are two main ways to get an auto loan.

  1. Preapproval by a bank or auto lender: Similar to a mortgage preapproval, this method gives you an idea of what type of auto loan you qualify for before stepping onto the car lot.
  2. Your dealer’s partner lenders: This allows you to conveniently take care of everything at the car lot but may end up being more expensive.

Regardless of which route you take, you’ll need to gather some paperwork to submit alongside your application.

Documents

The paperwork required for a loan application varies from lender to lender, but often includes:

  • Proof of identity: Driver’s license, passport or other government-issued I.D.
  • Proof of income and employment: Pay stubs, bank statements, T-slips, tax returns.
  • Proof of residence: If you recently moved, you can use a utility bill, bank statement, etc. Otherwise, your driver’s license usually works.
  • Vehicle info: If buying from a private seller or working with a lender directly, you’ll need a purchase agreement stating the purchase price, VIN (vehicle identification number), year, make and model.
  • Proof of auto insurance: To drive off the lot, you’ll need coverage that meets your province’s requirements.

To avoid a wasted trip, call your lender (or dealer) ahead of time to make sure you have everything.

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About the Author

Mitchell Glass

Mitchell Glass

Freelance Contributor

Mitchell is a freelance contributor to MoneyWise.

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