If you’ve got a new car or a new-to-you car in your sights, you might be wondering what factors contribute to your ability to qualify for a car loan. Whether this is your first time buying a car or you simply want to be armed with more knowledge for your next purchase, we’ve got you covered.
There are many different factors that determine whether you’ll qualify for a car loan. In this article, we’ll take a look at these factors and walk you through how you can improve each one to increase your chances get an auto loan.
Your Credit Score Matters
Your credit score plays an important role in determining whether you qualify for a car loan and what type of car loan you can get. The higher your score, the lower your interest rate and down payment. But that doesn’t mean you need a perfect score to get a loan. In fact, in 2020, 30% of car loans went to people with a credit score below 600.
Car loans are divided into different types based on your credit score. The lowest interest rates offered to those with the highest credit scores of 781-850 are called superprime loans, while the highest interest rates given to those with the lowest credit scores of 300-500 are called deep subprime loans. There are various levels of prime loans in between with interest rising as the credit score lowers.
You don’t need a great credit score to get a car loan, but your score will drastically change how much interest you’ll pay with a typical range of 3% - 20% depending on current rates. If you want the best rate, work on paying off debt and lowering your credit utilization to improve your credit score.
Your Income Will Be Considered
Though your credit score is certainly important, your income is also weighted in the decision to offer you a car loan. While your credit score determines what type of loan you qualify for, your income determines how much car a lender believes you can afford.
Specifically, lenders look at your debt to income ratio (DTI). This number is calculated by taking all your expenses and determining how much income you have available after your bills are paid. The lower the DTI, the better, and for those consumers with challenging credit scores, DTI is even more important.
Understanding How Your Residence Factors in.
It might seem like a small factor, but your residence does factor into a car loan decision. You’ll need to have proof of residence to qualify for a loan. And how long you’ve lived at your residence, whether you rent or lease, and your household income matters. You’ll also need to have auto insurance. How much and what type depends on your state’s laws.
In Florida, you’ll need a minimum coverage of $10,000 for personal property damage and $10,000 for personal injury. Make sure you factor in your monthly auto insurance premium when considering how much car you can afford.
Down Payment or Trade-In?
In general, you’ll need to put some money down in order to qualify for an auto loan. This can come in the form of a down payment or through trade-in of your current vehicle. It is possible to get a car without any down payment, but it will mean you’ll need to finance more.
The good news is, if you can come up with a large down payment, you’ll pay less money over the life of the loan. Remember, a down payment doesn’t have interest added to it, so it’s usually a good plan to pay as much of a down payment as you can, saving you money in the long run.
When to Consider a Co-Signer
In general, most people can qualify for an auto loan, even with a less-than-ideal credit score or income. But, sometimes, extenuating circumstances prevent a buyer from qualifying or getting a reasonable rate. It can sometimes feel like a lose-lose situation if your credit score and income are challenged and you only qualify for a loan with a 20%+ interest rate.
If that’s the case, you do have other options. One option is to consider getting a co-signer with good credit and income. But keep in mind, if you are unable to make your payments, your co-signer will bear the burden. You’ll need to make sure your co-signer is someone who trusts you and whom you trust.
And if you can’t find a co-signer but still need to purchase a car, remember that we’re here for you. We’re seasoned in helping people through stressful financial situations, and our lenders are happy to help you find a loan that works for you or even help you get on a path toward financial wellness.