Which Type of Credit Score Is Most Used for Auto Loans?
When shopping for a car, most consumers are well aware that the car dealership will check their credit before moving ahead with a sale. Simply put, the better one’s credit, the lower the rate, and the more choices that person has in vehicles and corresponding loan terms.
A higher credit score can mean a lower rate for a larger loan amount, enabling a borrower to drive off the lot in a nicer car. According to credit reporting agency Experian, in the first quarter of 2020, borrowers with the highest credit scores were, on average, able to obtain interest rates on new cars at rates below 4%.
What Scores Do Auto Lenders Use?
While there are dozens of different scoring models, most lie in the 300–850 range. Because of differences in algorithms and in the underlying data on which they are based, slight variations may occur.
FICO Scores: Created by Fair Isaac and Company in 1989, the FICO score is one of the most widely used in credit decisions. Though not specifically created for auto lenders, companies may still use a base FICO Score when reviewing applications for auto loans.
FICO Auto Scores: There are multiple versions of the industry-specific FICO Auto Score, which is created specifically for auto lenders. The FICO Auto Score is adjusted to better predict a borrower’s likelihood of repaying an auto loan on time. A consumer’s history with auto loans figures largely in the formulation of a FICO Auto Score.
VantageScore: Founded in 2006 by the three major credit bureaus — Equifax, Experian and TransUnion — VantageScore continues to gain momentum since its inception. Though similar to the FICO scores, VantageScore is generally considered a more comprehensive indicator of creditworthiness, especially for groups of consumers new to the credit industry or those who are “light” users of credit.
As such, first-time car buyers or those who rarely use credit — and thereby rarely apply for auto loans — can perhaps find themselves with better options at the dealership if that dealer bases credit decisions on VantageScore.
Can I Check My FICO Auto Score?
Yes, you can. Consumers can purchase the FICO Score 1B Report to get access to 28 variations of a FICO score, including the FICO Auto Score. Keep in mind that the FICO Auto Score uses a 250–900 range, which is different from the traditional 300–850 FICO or VantageScore.
There are four versions of the FICO Auto Score that a lender may use. The FICO Auto Score 9 is the latest iteration, and the one that’s currently used across all credit bureaus, according to The Balance.
What Else Do Dealers Use To Come up With the Auto Loan Rate?
Apart from the credit score, there are other criteria that lenders use to underwrite an auto loan. Let’s look at a few.
Loan Term: The longer the repayment term, the more risk it carries for the lender. This is in terms of both the chance of borrower default and that market interest rates may increase in the future. If rates increase, the lender can underwrite newer, more profitable loans to new borrowers.
Down Payment: Higher down payments usually mean a lower rate. This reduces both the risk for the lender and the total loan amount.
New vs. Used Vehicles: Generally, manufacturers offer incentives to dealers to sell new inventory; such incentives do not exist for used cars. There are often higher rates on used cars, even if the value of the car and the corresponding loan amount are lower.
Debt-to-Income (DTI) Ratio: This is how much of one’s gross monthly income goes towards servicing debt (i.e., paying off credit accounts). A high DTI signals risk and may lead to a higher rate.
Dealership Type: According to Experian, interest rates can vary if one purchases through a franchise dealer versus an independent dealer. In general, franchise dealers provide a slightly lower rate for consumers.
Getting Smarter About Managing Credit
It might be a good idea to not only check one’s credit score before walking into the dealer showroom, but to also try and improve it. This puts the borrower in the strongest position possible when negotiating prices and rates. Paying off low balances, disputing errors and asking credit card companies to increase your credit limit can all go a long way in improving your credit before you apply for an auto loan.
Consumers are able to receive one free credit report per year, as per the terms and conditions of the Fair Credit Reporting Act. However, reports from the three different credit bureaus — without scores — may not be enough to understand a credit decision that will be made at the dealer showroom.
Instead, regular monitoring and interpretation of credit usage is in order. Borrowers should consider tools to provide them with insights they need to improve their credit. For example, ScoreBuilder creates a personalized 120-day plan to help consumers understand what is hurting and helping a credit score, including suggestions of actions to take for improvement*.
A tool like ScoreMaster goes even further. Rather than waiting to see how a payoff or new loan might affect a score, ScoreMaster provides simulations of credit scores based on hypothetical payments and spending decisions. More insightful than a static credit report, Scoremaster can help individuals understand the dynamics of credit and the impact of payment decisions on their overall score.
*This feature unlocks if you have negative credit data.
Disclaimer – FICO® is a trademark of Fair Isaac Corporation and is unrelated to SmartCredit®. TransUnion®, Experian®, Equifax®, and VantageScore® are registered trademarks of their respective owners. Your results may vary and are not guaranteed.