Overview

When you’re looking to purchase a new car, there are many things to consider. First, you have to find the right car that meets your needs and budget.

Then you must find financing to fund the purchase of the car.

If you decide to finance your car with an auto loan, there are a few key things lenders will look for.

Auto loans are designed to help consumers buy a car that costs much more than most could afford with cash. Unless you have a large savings account or have been given a check from your insurance company as a result of an accident, you will probably need to find an auto lender that can work with your credit score.


Preparation for an Auto Loan

First and foremost, you want to ensure you are not only eligible but also prepared to find an auto loan.

Some of the documents needed for a car loan include:

Proof of Identity

Lenders require that you provide a valid form of government ID, whether it is a A man has a down payment and form of identification for an auto loandrivers license, ID card, or a passport. Obviously, lenders will need to know that you are who you say you are.

If you are thinking of applying for an auto loan with your current bank, identification may not be needed.

Most large banks will already have your information if you have an active checking or savings account. The only way to avoid using identification is if you purchase the car in full with cash.

Proof of Residency

An auto loan lender will need to know where they can contact you, which is why proof of residency is required. Although each and every bank or lending institution has their own address requirements, an ID or a current utility bill should be enough.

Lenders like to see that you have lived at your current address for more than 6 months.

Although the length of your residency does not affect your chances of approval to largely, lenders want to see “stability” in their borrowers.

Lenders also worry about multiple addresses since it may be hard to track you down if the car enters repossession.

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

Proof of Income

Auto lenders like to see borrowers who have a stable income or employment history. Before your lender approves you for a loan, they will want to ensure that you can pay back the money you borrowed, with added interest.

To prove your income, you can use one month’s worth of paystubs. If you do not have pay stubs (like if you are self-employed), some lenders can work with your bank statements from the last 2 months. Some lenders may require further income verification.

Most lenders like to see that you are earning at least $1,500 per month, before any and all taxes. On average, lenders do not want your auto loan payment to exceed 20% of your gross income.

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

If you already have too much debt with a low income around $1,500 per month, you may find it hard to find a dealer that can work with you.

A ratio that lenders use to evaluate your income is called the “debt to income ratio”. Your debt to income ratio should be no more than 35% of your total pre-tax monthly income, with your new car payments included.

For example, if you earn $2,000 per month, before taxes, and have $300 in debt expenses (like a credit card bill) per month, your debt to income ratio is 0.15. We found this by taking the $300 and dividing it by your total income of $2,000 per month.

If you were looking to apply for an auto loan that will cost you around $300 per month, your total monthly debts would amount to $600 ( $300 in monthly credit card debt expense plus $300 in auto loan payments).

Take the $600 and divide by your income of $2,000 per month to get a debt to income ratio of .30, which is close to the cutoff for many lenders.

You are allowed to use any public assistance, social security, and alimony as a form of income as well when applying for an auto loan.

Down Payment

Almost any and all lenders will require a down payment, especially if you are applying for an auto loan with bad credit. A down payment helps provide assurance to your lender that you have a “personal interest” in the car.

If you fail to make your payments and the lender is forced to repossess your car, you will not have your down payment returned to you.

Often times, bad credit auto lenders will require a down payment of at least $1,000 or 10%, whichever amount is lower given the car you are looking to buy. If you are unable to provide a down payment, your chances of getting approved with bad credit are very slim.

Some dealerships do have promotions for $0 down payments. However, be wary of lenders that require a $0 down payment.

Although a $0 down works for people with healthy credit scores, many “buy here, pay here” dealers will charge aggressive interest rates to consumers with bad credit that provided a $0 down payment.

You can use your bank account statements to prove that you have the funds needed for a down payment. Having a larger down payment is also a great way to save on interest since you will be paying less money back over the life of the loan.

However, we do not recommend wiping out your entire bank account for a down payment, in case of an emergency.


Your Credit Score and Credit Report

It is safe to say that one of the largest factors that can affect your approval odds for an auto loan is your credit score.

Your credit score is essential to determine the interest rate you pay since its the most “effective” tool in determining a borrowers level of risk.

Before you apply for an auto loan, you should know your score and read your credit report.
The information on your credit report is what is used to produce your credit score.

The 3 major credit bureaus (Equifax, Experian, and TransUnion) collect and A persons credit score before getting a auto loanreceive information from lenders, creditors, and banks. The information is then inputted into a proprietary equation to produce a 3 digit number (your credit score).

Anytime you apply for a loan, a lender will need to perform a hard credit check, sometimes referred to as a hard credit pull. This allows them to view your score and report and look for any tall tale signs that you may not be able to repay them.

It’s important to note that some auto lenders have their own credit scoring model they use. This model is more focused on repayment, especially with past auto loans you may have taken out.

The score used for most auto loans is referred to as a “FICO Auto Score”.

They take the same inputs in your credit report, but place more weight on past repayments, especially if you’ve had an auto loan in the past.

Lenders just want to know that you’ve been able to pay for your auto loans in the past.


What Auto Lenders Look At

  • Any late payments on a previous auto loan.  Lenders want reassurance that you are able to repay them. If you weren’t able to make on-time payments on your last car, a lender will be hesitant.
  • If you have had to settle a lease or auto loan “Settling” an auto loan is no different than having a repossession. If you had to turn your last lease or auto loan in due to your inability to pay, it will show on your credit report as a “settled loan”.A settled loan is no different than a repossession and will lower your credit score just as much as a normal repossession would.
  • If you have had a car repossessed in the past. Clearly, having a repossession performed is an expensive and time-consuming task. If you have had a recent repossession, you may be denied for a loan. If this is a case, your only options may be a buy here pay here dealership.
  • If you filed for bankruptcy, was your auto loan included in the bankruptcy discharge? Filing for bankruptcy allows you the opportunity to wipe out all of your debts, but it can leave lenders with a bad taste in their mouth. If you have included an auto loan in a bankruptcy proceeding in the past, a lender may not trust that you can repay them.

What Auto Lenders Do Not Like

  • You’ve applied for a large number of loans or lines of credit in a short period of time. This scares lenders away because it gives the impression that you are in a financial bind and in desperate need of cash.Opening one credit card is normal, but opening 5 in the period of less than a month will raise a red flag. Multiple hard credit checks will be performed which can lower your credit score.
  • You have cosigned for a friend or family member. When you decide to cosign for somebody, their debt technically becomes yours. If the primary party is unable to make their monthly payment, their lender can come after you for the missing money.This can pose a risk to an auto lender because you may be burdened with too much debt in order to pay back your auto loan.
  • You’ve taken out multiple cash advances on a credit card. Taking out a cash advance indicates to a lender that you may have lost your job or are going through financial hardship. Cash advances are added to your debt balances.This, in turn, will increase your overall credit utilization rate, which then lowers your credit score.
  • Have had a short sale or foreclosure on a recent home. In the world of credit, a short sale is just as bad for your credit score as a foreclosure.This is because a short sale would be listed as a “settled debt” in your credit report, which is the same entry as a foreclosure. A foreclosure and short sale are viewed no differently.

How to Increase Your Odds of Approval

If you have a less than ideal credit score, you may be worried about getting access to reliable transportation. However, there are a few things you can do today to ensure that your chances of qualifying for an auto loan improve.

Check Your Credit Report and Score

Most Americans actually have no idea what their credit score is. Checking yourA man negotiates and shakes hands on a new car deal for a red car score is the best way to ensure that you are getting the best interest rate possible.

Before you apply for a loan, get a free copy of your credit report at annualcreditreport.com. This is the government mandated website to receive your credit report for free. You can receive your score for free three times per year.

Once you access your credit report, be sure to see if there are any negative entries or errors. Almost 1 in 5 Americans have an error in their credit report, and it almost always leads to a more “expensive” loan due to the interest rate you receive.

Find a Potential Cosigner

Cosigning is actually a great way to increase your chances of approval and lower the interest rate you pay. A cosigner is somebody that will let you “borrow” their credit score to qualify for a loan.

But be warned, being a cosigner is not a simple task. If the main borrower is unable to make their loan payments, you will be on the hook and required to pay for them, or else suffer damage to your credit score.

Do Research

This is the one step that I have seen cost consumers the most. Many consumers are simply used to walking into our bank for an auto loan and accepting the first offer they give you.

Shopping for auto loans at the best interest rate is the smart thing to do. Often times, you can also find a variety of online lenders that can have you approved in a matter of minutes.

Do not just accept the first loan offer you recieve. Chances are if you’ve been approved for a loan from one bank, another bank or lender will approve you too! There are also many businesses that specifically work with bad credit auto loan applicants.


Final Note

Life with bad credit can be challenging in many ways, including finding an auto lender that can work with you and your score. Before you drive to your local dealership or bank and get an auto loan, be sure to conduct thorough research on lenders around your area and online that can help.

If you are looking to buy a new car but are in need of financing, CrediReady can help. Our nationwide network of trusted dealers and verified lenders work with buyers in all credit situations. Take a moment to fill out our free no-obligation loan inquiry form and start shopping for your dream car today!