Breaking Down Credit Scores, Credit Checks, and Simple-Interest Car Loans

A guide to understanding how certain financial basics can impact your car-shopping experience.

Tia Brown & Josh Jacquot | 

Nov 5, 2021 | 4 min read

Updated on March 24, 2026

Getty Images

Understanding credit scores and how they affect car loans can help you feel prepared when you're car shopping. Let's break down what you should know before financing a vehicle.

• What is a credit score?
• What credit score do I need to buy a car?
• What's the difference between a soft and hard credit check?
• How do simple-interest car loans work?

What Is a Credit Score?

A credit score is a numerical summary of your credit history, based on factors such as whether you pay bills on time, how much debt you have, and how long you have been using credit. Lenders use this score to assess how risky it may be to lend you money when you apply for an auto loan.

Scores starting at 670 are categorized as “Good” by FICO. These scores can begin to earn more attractive incentives like a lower annual percentage rate (APR) from lenders in the financing agreement. Anything above 800 is considered an “Exceptional” FICO score. Lenders may be more likely to want to land a deal with you if your score indicates a strong history of consistent repayment and good credit management.

What Credit Score Do I Need to Buy a Car?

QuickTake: There is no single minimum credit-score requirement to buy a vehicle. Different lenders have different criteria, and approvals depend on more than just your score. 

Borrowers with higher credit scores are generally seen as lower risk, which often results in lower interest rates. Lower interest rates reduce the total cost of the loan over time.

For buyers with lower credit scores, interest rates may be higher. This reflects the lender's assessment of risk, not a judgment of the borrower. Understanding this can help set reasonable expectations and encourage shoppers to focus on what they can realistically afford rather than just approval for a loan.

Alongside your credit score, lenders will also consider factors like income, employment history, and existing debt. This means buyers with limited or imperfect credit might still qualify for financing, though the loan terms may differ.

What's the Difference Between a Soft and a Hard Credit Check?

QuickTake: A soft credit check doesn't affect your credit score, whereas a hard credit check, which occurs when you formally apply for credit, can cause a small dip in your credit score. 

A soft credit check does not affect your credit score. Soft inquiries are often used for prequalification or background checks and are not visible to lenders reviewing your credit report. 

A hard credit check, however, can affect your credit score. These can occur when you formally apply for credit, such as an auto loan, and they are recorded on your credit report. Hard credit checks may cause a small, temporary dip in your credit score.

If a hard credit check by a dealer makes you nervous or if you just want to see what your options are, it can be a good idea to get pre-approved by other lenders before you discuss financing with a dealer. Shopping around for financing can help you feel confident you've secured the best terms.  

How Do Simple-Interest Car Loans Work?

QuickTake: In a simple-interest loan, the amount of interest charged decreases as the balance of the loan decreases. So making the payments on time and paying extra when possible can reduce the total interest you pay. 

Most auto loans are simple-interest loans. In a simple-interest loan, the interest you pay is determined by the amount borrowed. Interest is typically calculated based on the remaining principal and not compounded. 

In a simple-interest loan, interest is calculated solely off the principal amount borrowed. 

So the amount of interest charged decreases as the balance of the loan decreases. In a compound-interest loan, interest is calculated using your principal plus unpaid interest.  

The simple-interest structure means that making the payments on time and paying extra when possible can reduce the total interest you pay. Interest accrues daily on an outstanding loan balance, so paying down a simple-interest loan sooner can lower your cost overall.

For new or first-time buyers, understanding simple interest helps clarify why loan length matters. Longer loan terms can lower monthly payments but may increase the total interest paid over the life of the loan. Given that the same amount is financed at the same rate, shorter loans cost less overall but require higher monthly payments. 

Tia Brown

As a self-proclaimed enthusiast for deals, my passion is to engage with the world of auto finance through relatability and life hacks. I’m a loyalist who sticks with what works. When it comes to cars, I am the kind of owner who places lifestyle at the core of my decision-making. My desire to drive is fueled by factors of sound quality to enjoy handpicked soundtracks on long trips, smooth gliding across open roads, and enough interior space to accommodate my growing collection of vinyl records and yard-sale treasures on any given Saturday. I’m the one you’ll find planning my next purchase around a buy I’ve been eying for months, waiting until the clearance closeout rolls around before I make a move.

Josh Jacquot

Josh Jacquot has covered cars from every angle. Over the course of his nearly 30-year career, he has conducted instrumented testing on thousands of vehicles and provided clear, data-driven insight for enthusiast and mainstream audiences alike. His work has appeared in leading outlets including Car and Driver, Motor Trend, and Edmunds. Known for blending driving rigor with clever analysis of real-world usability, he loves nothing more than a long powerslide in a car with usable cupholders. Equally comfortable discussing chassis dynamics and ownership costs, Josh brings credibility earned through decades of hands-on experience. But he‘s most excited by the emotional connection that only the right car can deliver.