There are several factors a person must consider when determining if they qualify for a car loan. Having good credit is a great place to start. However, lenders consider other criteria when evaluating a car loan application.
The Importance of a Good Credit Score
Good credit is essential whether a person is applying for a new auto loan or looking for auto loan refinancing. A good FICO score is between 670 and 739. If an applicant can do better, their chances of getting a loan increase.
Auto lenders evaluate applicants’ credit scores using FICO Auto Score or FICO 8. Other lenders may have their criteria for determining a person’s creditworthiness. It is possible to get approved for a car loan with less than perfect credit. However, the financial institution will charge higher interest rates or require a cosigner with established credit.
A Steady Income Source
Auto lenders see a steady income as vital. It improves the likelihood that an individual will make their monthly payments. Lenders vary in the proof of income they require. W-2 employees may need to bring recent pay stubs. Self-employed individuals or those who receive Social Security may need bank statements.
The lender will explain the process based on the applicant’s situation and determine what documentation is needed. According to Lantern by SoFi, “Each lender reviews specific borrower criteria, which varies from lender to lender, and influences the rate and terms an applicant may qualify for.”
Debt to Income Ratio
In addition to looking at an applicant’s income, a lender will evaluate the financial commitments they have every single month to see if a car loan fits into their budget. They will look at an applicant’s debt to income ratio. A high debt to income ratio lowers the loan amount a person qualifies for.
One way to offset this is by making a substantial down payment. Each automobile loan has a set margin. This is the percentage of the on-road car price the borrower needs to pay out-of-pocket. It is always favorable to have a down payment, which leads to borrowing less money and paying less interest. A down payment gives lenders the confidence that the person borrowing the money is good at budgeting and will not skip out on paying their debts.
Additional Eligibility Criteria
Regardless of the type of loan an individual applies in-person or online, they will be required to present some documents. These include identification, bank statements, proof of address, and proof of income. It is best to talk with the lending institution in advance to gather all of the documentation needed. This will speed up the application process.
Purchasing the Dream Car
Applying for a car loan is relatively easy. Getting approved can be a challenge. Knowing critical factors about applying for a loan will help individuals pick the right lender and minimize the hassle of the application process. A car loan is a long-term commitment. The better the applicant understands the process, the better it will be for them throughout the loan.