Unlike mortgages, car finance has no programme floor. Dealers arrange finance in the low 500s routinely. What changes is the rate, the deposit asked for, and how much of the price the lender will cover.
The five tiers
The industry prices in bands, and these are the names lenders use internally:
| Tier | Score range |
|---|---|
| Super prime | 781 and above |
| Prime | 661–780 |
| Near prime | 601–660 |
| Subprime | 501–600 |
| Deep subprime | 300–500 |
The gap between top and bottom is not marginal. On used-car lending, average rates between super prime and deep subprime have run to roughly fifteen percentage points. On a $25,000 loan over five years, that is the difference between paying about $3,000 in interest and paying about $12,000.
New and used are priced separately
The same borrower with the same score is usually offered a lower rate on a new car than on a used one, and the gap widens as the score falls.
Two reasons. A new car is easier to value and easier to sell if repossessed. And manufacturer finance arms subsidise rates on new cars to move stock — that is where the promotional 0% and 1.9% offers come from, and they are marketing budget, not credit pricing.
Those promotional rates are normally restricted to the top tier, and frequently cannot be combined with a cash rebate. The correct comparison is the subsidised rate against the rebate taken with outside finance, and the rebate often wins.
Rate shopping does not have to cost points
Scoring models treat multiple auto-loan enquiries inside a short window as a single enquiry. Older FICO models use 14 days; newer ones use 45.
So getting quotes from five lenders in one fortnight costs about what one costs. Spreading the same five across three months costs five times as much in score impact, for the same information.
Getting preapproved by a bank or credit union before visiting a dealer is the highest-value hour in the process. It gives a real rate to negotiate against, and it converts the dealer's finance office from the only option into a competing one.
What the dealer's finance office is doing
Dealers usually submit an application to several lenders and receive back a "buy rate" from each. They are generally permitted to mark that rate up before presenting it, and the markup is dealer profit.
Which means the rate offered in the finance office is not necessarily the best rate the lender approved for you. Arriving with your own approval is what makes that markup negotiable.
Debt-to-income does more work than the score
Auto lenders look hard at what the payment does to your monthly obligations. A common rough guide is that the car payment should not exceed about 10–15% of gross monthly income, and total debt payments including housing should stay under about 40%.
An applicant with a 700 score and a 45% debt ratio is declined more often than one with a 640 score and a 25% ratio. Score sets price; the ratio frequently sets the answer.
The long-loan trap
Seventy-two and eighty-four month terms exist because they make any payment achievable. They also mean paying interest for six or seven years on something depreciating faster than the balance falls.
The result is negative equity — owing more than the car is worth — which persists for years and then rolls into the next loan when the car is traded. Rolling negative equity forward is how a $28,000 car becomes a $34,000 loan.
If the payment only works over 72 months, the honest reading is usually that the car is too expensive, not that the term is too short.
Below 600
Approval is realistic but expensive, and the terms matter more than the rate:
- A larger deposit reduces the lender's exposure and often does more for the offer than a few score points.
- A credit union will frequently beat a dealer's subprime lender, particularly with an existing account.
- Buy-here-pay-here dealers approve almost anyone and charge accordingly; many do not report payments to the bureaux at all, so the loan does not even rebuild credit.
- Refinancing after twelve months of on-time payments is a genuine route out, and worth planning for from the start rather than discovering later.