You’ve decided you want to finance a vehicle. You’ve never applied for a car loan before though, so naturally, you have some questions. You’re wondering…
- Who qualifies for a car loan?
- What factors do lenders take into consideration?
- How can you improve your chances of getting approved?
In this post, you’ll find the answers to these questions, as well as information you can use when you apply. First, let’s break down the five things lenders look at before approving someone for a car loan.
1. Employment History and Income
Most loan providers want to see that you’ve been able to maintain a stable source of income for at least two years. It’s especially helpful if it’s been for the same employer. If you recently landed a new job, it doesn’t mean you won’t be approved. It just works in your favor if you’re able to demonstrate a stable, consistent place of work for two or more years.
To apply for a car loan, you’ll need a (1) recent pay stub and a (2) bank statement that can confirm how much you make. A lender might also ask you to provide references from work that can verify your employment.
2. Monthly Expenses
Figuring out what you’re able to afford each month is not just a job for your loan provider. It’s also a job for you!
First, determine how much money you’re bringing in each month. Then calculate what your vehicle expenses are. This might be difficult to do before actually owning the vehicle, but a rough estimate will be enough to help you determine what you can afford. Make sure to include things that go beyond the initial purchase like gas, maintenance, and insurance.
It’s recommended that your total expenditure on a vehicle should not exceed more than 10-15 percent of your gross income. In 2015, the average annual Albertan’s salary was $60,476 gross. That’s approximate $5,000 a month. That means if you’re following the 10 percent rule, you shouldn’t be spending anything more than $500 a month on a car payment.
Also See: How to Budget For a New Car
3. Outstanding Debt/Bankruptcy
With a credit application comes some detective work on the part of the lender.
You’re going to be asked to provide parts of your financial history. This will include whether or not you’ve filed for bankruptcy in the last seven years. This will also include child-support payments, alimony or if you’ve ever dealt with collections.
The best policy is to be honest and forthcoming with your information. Lenders like Go Auto will work hard to get you approved, even if your credit is less than perfect. In order to do this, though, we need to know the truthful details of your credit history.
4. Credit Score
Your credit score plays a huge role in whether or not you’ll be approved for a car loan. It’s also taken into consideration when determining what your interest rate will be. Your credit score is a product of both your debt-to-income ratio and bill-payment history.
The higher your credit score, the lower the interest rate. People with credit scores of 650 or higher (the range is from 300 to 900) qualify for the lowest interest rates. A credit score around 600 usually means a slightly higher interest rate and finally, scores of 500 or lower could mean even higher rates and the possibility of being denied.
Sometimes a co-signer is required for individuals with low credit scores – someone with a higher credit rating and better financial history that can assume responsibility for the loan, should you default.
You’re entitled to one free credit check a year. It’s a great way to keep an eye on your credit rating and it will help you better understand what type of interest rate you’ll receive.
Also See: How is My Credit Score Calculated?
5. Down Payment
Putting money down immediately not only demonstrates your ability to save, but it lowers the total amount of your loan. That means less chance you will default, thus a greater chance you’ll be approved. We recommend down payments be anywhere from 10 to 20 percent of the purchase price.
Who Qualifies for a Car Loan?
Anyone can apply for a car loan. You just have a higher chance of getting approved if you have good credit and a stable source of income.
If you want to improve your chances of getting approved, focus on the five factors we listed above. Concentrate on ensuring you have a stable source of income, maintain your credit rating or work to improve it if it’s low and save for a down payment.
A Final Note: Bad credit doesn’t mean you won’t be approved It might mean a higher interest rate, though. Read on to learn more about How Car Loan Interest Rates are Determined.