Your credit score determines what interest rate you'll pay on a car loan, and that difference adds up to thousands of dollars over the life of the loan
A credit score is a three-digit number that lenders use to predict whether you'll repay borrowed money on time. It ranges from 300 to 850. The higher your score, the lower the interest rate a lender will offer you. On a car loan, even a difference of two or three percentage points in interest rate means paying $3,000 to $5,000 more over five or six years — money that comes directly out of your pocket.
If your score is below 620, many traditional lenders won't offer you a car loan at all, or they'll charge rates so high that the monthly payment becomes unaffordable. If your score is between 620 and 660, you'll pay significantly more than someone with a score above 700. Understanding how your score affects the loan you can get — and what options exist if your score is low — is the first step toward making a car purchase work within your budget.
Key Takeaways
- Your credit score directly determines your interest rate; a score below 620 makes traditional car loans difficult to find, while scores between 620 and 660 carry rates two to four percentage points higher than those offered to borrowers with scores above 700.
- Credit scores are built from payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent), and new credit inquiries (10 percent).
- You can request a free credit report from each of the three major bureaus once per year at annualcreditreport.com and dispute errors that may be lowering your score.
- If your score is too low for traditional lenders, credit unions, buy-here-pay-here dealers, and some banks offer loans to borrowers with poor credit, though rates are higher and terms are stricter.
- Paying down existing debt and making all payments on time for several months can raise your score enough to may have access to for better rates before you apply for a car loan.
How credit scores are calculated and why lenders care
Your credit score is built from five categories of information in your credit report. Payment history — whether you've paid bills on time — makes up 35 percent of your score. Amounts owed — how much of your available credit you're currently using — makes up 30 percent. Length of credit history makes up 15 percent. Credit mix — having different types of credit like credit cards, loans, and a mortgage — makes up 10 percent. New credit inquiries make up the final 10 percent.
Lenders use your score as a shortcut. They don't have time to review every application by hand, so they use your score to estimate risk. A person with a 750 score has historically paid their bills on time and kept debt levels manageable. A person with a 580 score has missed payments, carried high balances, or both. From the lender's perspective, the 750-score borrower is less likely to default, so they offer a lower rate to compensate for lower risk. The 580-score borrower gets a higher rate because the lender is taking on more risk.
For a car loan specifically, lenders also look at your debt-to-income ratio — how much you already owe each month compared to your gross income. Even with a decent credit score, if you're already paying $1,500 a month in debt and you earn $3,000 a month, a lender may decline you or offer a smaller loan amount. Your score and your income situation work together.
What your credit score means for car loan rates
Interest rates on car loans vary by lender, the age of the car, and the loan term, but credit score ranges produce predictable patterns. Someone with a score above 740 might receive a rate of 4 to 6 percent from a bank or credit union. Someone with a score between 660 and 739 might receive 6 to 9 percent. Someone with a score between 620 and 659 might receive 10 to 15 percent. Someone with a score below 620 may be offered 15 to 29 percent or may not be offered a loan at all.
To see what this means in dollars, consider a $15,000 car loan over 60 months. At 5 percent, your monthly payment is about $282 and you pay $1,920 in interest. At 12 percent, your monthly payment is about $333 and you pay $4,980 in interest. At 20 percent, your monthly payment is about $396 and you pay $8,760 in interest. The difference between a good score and a poor score is not just a higher monthly payment — it's thousands of dollars in extra cost.
How to check your credit report and dispute errors
You are may have access to to one free credit report from each of the three major credit bureaus — Equifax, Experian, and TransUnion — every 12 months. Go to annualcreditreport.com, which is the official site run by the three bureaus. Do not use other sites that claim to offer free reports; many charge a fee or sign you up for a paid monitoring service. Enter your name, address, Social Security number, and date of birth. You can request all three reports at once or space them out over the year.
When you receive your report, read it carefully. Look for accounts you don't recognize, payments marked as late that you know you made on time, or balances that don't match what you owe. Errors are common. If you find one, contact the bureau in writing — email or phone is faster, but written documentation is stronger. Include a copy of proof (a bank statement, a payment receipt, a letter from the creditor). The bureau has 30 days to investigate and respond. If they confirm the error, they must remove it from your report, and your score may rise.
You can also get your credit score itself from several free sources: Credit Karma, NerdWallet, and many banks and credit card companies now offer free score monitoring to their customers. These scores may differ slightly from the score a lender sees, but they give you a realistic picture of where you stand.
Raising your credit score before you apply for a car loan
If your score is below 660, waiting three to six months to apply for a car loan — while you work on your score — can save you thousands in interest. The fastest way to raise your score is to pay down existing debt, especially credit card balances. If you have a credit card with a $3,000 limit and a $2,700 balance, paying it down to $1,000 can raise your score by 50 to 100 points within a month or two. Lenders look at your credit utilization ratio — the percentage of available credit you're using. Keeping it below 30 percent signals that you manage credit responsibly.
The second most important step is to make every payment on time for the next several months. A single late payment can drop your score 50 to 100 points. But if you've had late payments in the past, making on-time payments now gradually rebuilds your score. After six months of on-time payments, your score typically rises 20 to 50 points. After 12 months, it rises another 20 to 50 points. This is slow but reliable.
Avoid opening new credit accounts or applying for new credit while you're rebuilding. Each application triggers a hard inquiry, which temporarily lowers your score by a few points. Multiple inquiries in a short time signal to lenders that you're desperate for credit, which raises their risk assessment. Space out any new credit applications by at least six months.
Car loan options when your credit score is low
If you need a car now and your score is too low for a traditional bank or credit union, you have three main alternatives. Credit unions often have more flexible lending standards than banks and may work with borrowers with scores as low as 580 or 600. If you're not already a member, you may be able to join through your employer, a professional association, or a community organization. Credit union rates are typically lower than other subprime options, and their loan officers may be willing to discuss your situation in detail rather than relying solely on an automated score.
Buy-here-pay-here dealers are used car lots that finance the vehicles they sell directly to customers. They don't check credit scores at all. Instead, they require a down payment (often $1,000 to $3,000), set a weekly or bi-weekly payment schedule, and install a GPS tracker and starter interrupt device on the car. If you miss a payment, they can disable the car remotely. Rates are high — often 18 to 29 percent — and the car is usually older with higher mileage. But if you have no other option, this is a way to get reliable transportation.
Some banks and online lenders specialize in subprime auto loans and will work with scores as low as 500. Rates are high, but they may offer better terms than a buy-here-pay-here dealer. Shop around; rates vary widely even among subprime lenders. Be cautious of lenders who may provide approval without checking your credit or income — that's a sign of a predatory operation.
What to do if a lender denies you
If a lender denies your car loan application, they are required by law to tell you why. They must either tell you directly or provide you with the name and contact information of the credit bureau they used. Request this information in writing and keep a copy. Then contact the bureau and ask for the specific reasons your application was denied. It may be your credit score, your debt-to-income ratio, insufficient credit history, or an error on your report.
If the reason is an error, dispute it immediately. If the reason is your score or debt-to-income ratio, you now know what to work on. If the reason is insufficient credit history — you're new to credit or have very few accounts — consider becoming an authorized user on someone else's credit card account. This adds their payment history to your report and can help build your score faster. Alternatively, apply for a secured credit card, which requires a cash deposit but reports to all three bureaus and helps establish a credit history.
Do not apply to multiple lenders in quick succession. Each application triggers a hard inquiry and lowers your score. Space applications out by at least two weeks, and ideally by a month. If you're shopping for rates, do all your applications within a 14-day window; credit scoring models treat multiple inquiries in a short time as a single inquiry, so the damage is minimized.
Frequently Asked Questions
How long does it take to raise my credit score enough to get a better car loan rate?
It depends on your starting score and what's dragging it down. If your main problem is high credit card balances, paying them down can raise your score 50 to 100 points in one to two months. If your main problem is late payments, you'll need six to 12 months of on-time payments to see significant improvement. Negative items like collections or charge-offs take longer — typically two to three years — to stop hurting your score.
Should I co-sign with someone who has better credit?
A co-signer with good credit can help you get approved and may lower your interest rate by one to three percentage points. But the co-signer is legally responsible for the loan if you don't pay. If you miss payments, it damages their credit score too. Only ask someone to co-sign if you're confident you can make every payment on time.
Does getting pre-approved for a car loan hurt my credit score?
A pre-approval triggers a hard inquiry, which temporarily lowers your score by a few points. But pre-approval is worth it because it tells you exactly what rate and loan amount you may have access to for before you go to a dealership. This prevents a dealer from running multiple inquiries and gives you negotiating power. The score impact is temporary and small compared to the benefit.
Can I get a car loan with no credit history?
It's difficult but possible. Lenders prefer to see at least two years of credit history. If you have none, start by becoming an authorized user on someone else's account or getting a secured credit card. After six to 12 months of on-time payments, you'll have enough history to apply for a car loan, though rates will be higher than for someone with established good credit.
What's the difference between my credit score and my credit report?
Your credit report is a detailed record of your credit history — all your accounts, payment history, and balances. Your credit score is a single number calculated from that report. You can have errors on your report that lower your score unfairly. That's why checking your report for mistakes is important, even if you don't know your score.