What Determines if I Get Approved for a Car Loan?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

, Contributing Writer - September 17, 2020

While your credit score is important when you apply for a car loan, there are many other important things that lenders look at before you get the stamp of approval. We cover what lenders look for when you ask for auto financing, and how to improve your approval odds if your credit score isn’t the best.

What Do I Need for a Car Loan?

Besides finding a lender that can work with your credit situation, there are many things that lenders look at before they give you the A-OK on vehicle financing. Everyone’s situation varies, and each lender is likely to have varying standards for a car loan approval. However, most tend to look at similar aspects of your financial health.

Typically, you can expect an auto lender to ask:

  • What your minimum monthly income is
  • How long you’ve been at your job and for your past work history
  • For details on certain items on your credit reports
  • What your monthly expenses are
  • If you have a down payment and/or trade-in

Your lender might ask more or less questions pertaining to your employment history or credit reports before they can determine your ability to take on a car loan. Some things that may be a deal breaker to one lender may not be for another, so simply be honest and ask questions about the lender’s requirements beforehand.

Expect to bring some supporting documents that prove you have the available income and enough room in your budget to afford the vehicle, like check stubs, bank statements, and possibly some copies of your monthly expenses.

A big concern for many borrowers is whether or not they need a down payment to get approved for an auto loan. The answer? It depends on the selling price of the car you’re looking to finance, and the type of lender you're working with. Bad credit borrowers are almost always asked to bring a down payment, usually of at least $1,000 or 10% of the vehicle’s selling price.

Regardless of credit score or the type of lender, a down payment lowers your monthly car payment. Down payments can make an auto loan more manageable each month, and they tell the lender that you’ve got skin in the game. Borrowers who make down payments are also less likely to default on their loans. Trade-ins can help meet down payment requirements, too.

Besides proving you’ve got income, you’ve got to show the lender that you have enough available income to afford the vehicle.

Auto Loans and Debt to Income Ratio

Even borrowers with good credit, a down payment, and steady income still have to meet another important requirement. If you have enough monthly income to afford a car, your auto lender is likely to calculate how much available income you have. They use what’s called the debt to income (DTI) ratio, and it’s expressed in a percentage.

Lenders don’t typically lend to borrowers with DTI ratios above 45% to 50%, with the car loan and insurance costs factored in. If over half of a borrower’s income is being taken up by other expenses, approving them for the loan risks overextension. Getting an auto loan that stretches your budget too thin could lead to a default and a repo – which no one wants!

To calculate your own DTI ratio and learn where you and your budget are, it’s simple math.

First, add up your monthly expenses (aside from some utility bills), like loans, rent/mortgage, insurance, etc. Lenders add an estimated monthly car loan payment to the ratio, so create a payment you think you can afford. Then, the lender usually adds a monthly auto insurance payment of an estimated $100 (your insurance may cost more or less each month).

  1. Monthly expenses + car payment + auto insurance = DEBT
  2. Your pre-tax monthly income = INCOME
  3. Divide your DEBT by your INCOME to get a decimal answer.
  4. Convert the decimal to a percentage.

For example, if you determine your DEBT to be $850 and your pre-tax monthly INCOME is $2,500, you would divide 850 by 2,500 to get 0.34. Converted to a percentage, your DTI ratio would be 34%.

Now that you can calculate your DTI ratio, you can start to see how much of a car payment you can afford. You can also play around with our auto loan calculator, and start budgeting for a car based on your circumstances.

Choosing a price ceiling that best fits your situation can improve your chances of landing an auto loan approval. Talking to a lender about loan amounts that are within your means can speed up the whole process, as well as prepare you for an estimated cost of the vehicle and its overall expenses.

Choosing the Right Lender

Every borrower’s credit reports are going to contain different information. Some have more negative marks than others, and those can lead to a lower credit score. For borrowers with bad credit, seeking a subprime lender is a good start in increasing their approval odds.

Most traditional auto lenders have strict credit score requirements – and even if you have enough room in your budget to afford a car, a low credit score could be a reason for denial. Subprime lenders, however, work specifically with credit-challenged borrowers through special finance dealerships.

If you’re a bad credit borrower, choosing the right lender for your credit score can increase your chances of getting into your next vehicle. If you’re ready to get in touch with a dealer that has the lending options you need, start right here with CarsDirect.

We have a nationwide network of special finance dealerships, and we want to find you one in your local area. Get started by filling out our free auto loan request form!

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

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