Are You Ready for a Car Loan?

Milad Hassibi April 24, 2018


If you have less than perfect credit, its vital that you make a budget before any large purchase you make, including a car. However, how can you be certain that you are able to afford the monthly payments on a car?

Are you ready?

One way you can save big on monthly car payments is by providing a down payment upfront. Down payments are unavoidable when it comes to financing a car no matter your credit. Essentially, a down payment on a car shows the lender that you are invested in the car and thus more likely to meet your monthly payments.

Typically, if you are working with a subprime lender, they will require a down payment of 10% of the cars purchase price or $1,000, usually whichever is the lower amount.

The down payment factor

What many consumers don’t know is that a down payment is an effective money saving tool. TheMan holding a large amount of cash and was approved larger the down payment you leave, the lower your overall interest rates will be on your monthly payments.

Essentially, you will be paying much less over the lifetime of the loan with a larger down payment.

Plan out when you will start saving for your down payment and exactly how much you want to put down, this will give you a goal to work towards.

Financial ratios

The next thing you should look at is your debt to income ratio and your payment to income ratio. These are common ratios dealers and lenders will use to analyze whether they think you can afford to make your car and insurance payments.

Debt to income compares your monthly expenses to your pre-tax income. In order to get this number, you should add up all your monthly bills including rent, insurance payments, utilities etc. and divide that number by your pre-tax (gross) salary.

As an example, if your total monthly expenses are $1,500 and you make $4,500 per month before taxes are removed, you should have something along the lines of ($1,500/$4,500 = .333. Usually, a lender wants to see that your debt to income ratio is less than .50.

Get a Car Loan with Any Credit Along with a Happy Couple and a New Black SUV next to them

Next up is your payment to income ratio. This ratio is used by lenders to see if you can afford the monthly expenses for a car payment and insurance payments. Most lenders and dealers do not want your car and insurance payments to exceed 20% of your total income at a maximum.

If you want to find out what your total payments should be, simply take your income per month (pre-tax) and multiply it by the percentage you feel allocating to your car and insurance payments. If we use the same income of $4,5000 per month and multiply that by .20, we get $900.

One thing to remember is that depending on your score, some of the above methodologies and calculations may be different. Each lender and financier is unique with their own systems in place. If you feel that you cannot afford to take on the responsibility of a car, it may be time to wait for a larger down payment so that your interest rates can be lower.

Final Note

If you are looking to finance your new car and have less than ideal credit, CrediReady offers one of the largest databases that connects dealerships, lenders, and buyers in all credit situations. Take a few moments to fill out our free and confidential loan search form online and we will match you with a dealership in your local area that can meet your auto financing needs.



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