Nowadays, owning a car is more of a necessity rather than a luxury. However, with auto prices going up every day, it would be relatively difficult for anyone to acquire a car without seeking financial help.
Can I qualify for an auto loan even with a bad credit score?
With the emergence of various lending firms, securing an auto loan is far much easier than ever before. What is more amazing is that it now possible for you to get financing for your next car even if you have a bad credit score. By engaging the right lenders, you can easily drive off the car of your dreams within no time, as long as you meet all the minimum requirements for an auto loan.
Read on and discover 10 simple steps to qualifying for your next auto loan.
Proof of Identity
Before applying for financial assistance from any lender, you must produce documents that prove your identity. This is particularly important if you are applying for an auto loan from a specific lender, for the first time. In any case, no lender can offer credit to an unknown person. For this reason, you must prove to them that you are who you say you are.
Even though each lending institution accepts different identification documents, proving your identity is certainly not a tough requirement. In most cases, you might only be required to submit a government-issued Medicare ID, photo ID, passport, social security number or even a utility bill, as proof of identity.
You Must be 18 Years of Age or Older
The legal age for applying for an auto loan or any other type of auto-related financial assistance is 18 years. However, some states allow for younger applicants aged between 16 and 17 years to apply for an auto loan.
This is simply because the law considers people below the age of 18 years as minors. Moreover, minors are legally barred from engaging in contractual agreements with any lending institution without seeking the consent of a parent or a guardian.
Hold a Valid Driver’s License
For assurance purposes, most creditors would want to know if the applicant has the legal authority to operate a vehicle. You must, therefore, hold a valid drivers license at the time of application. This is crucial because it is almost impossible for applicants to continue making payments on a vehicle they cannot drive.
The only case where a license may not be necessary is when you are buying the car for someone else. However, this only applies if you are financing the purchase using your own resources rather than an auto loan.
Have a Guaranteed Fixed Income
Most lending institutions require proof that you have a full-time job, or you have a guaranteed fixed source of income. Proof of income is one of the ways the lender may use to assess your ability to repay your loan. Seemingly, you are more likely to receive financing if you have a full-time job.
Nevertheless, it is very much possible to get a car loan even if you are unemployed or working part-time. However, this depends on the lender and various circumstances at the time of application. If you meet all other minimum requirements for an auto loan, the lender may consider your application, but you might have
to pay higher interest to cover for the risks involved.
Minimum gross monthly income of $1,500 to $2,000
The minimum gross monthly income requirement varies from one lender to another. However, most financial institutions require that your monthly pre-tax income should range from $1,500 to $2,000. In addition, this amount should come from a single source and it should be verifiable, accompanied with appropriate documentation such as W-2 forms, and bank statements.
Any additional income such as social security and Medicare do not apply. Therefore, if you have multiple jobs, the lender will only use the income range from the highest earning job. The good news is that you are more likely to secure a loan with lower interest rates if your income is on the higher end.
Proof of insurance
When buying a car using a loan, the vehicle technically belongs to the lender until you finish the whole installment. For this reason, it is mandatory that you purchase a full coverage auto insurance policy to protect the lender from any losses in case something happens to the vehicle.
This acts as a precautionary measure since you are more likely to default on your payments if something renders your car unroadworthy. However, with insurance coverage, you may file a claim for compensation, subsequently cutting down on potential losses as far as servicing your loan is concerned.
Proof of Residence
You will need to provide proof of residency at some point during the loan application process. Essentially, you must be a legal resident, and an American citizen when applying for an auto loan or any other type of financing in the U.S. You will be required to carry along various documentation such as a utility bill to verify your residential address.
Notably, lenders often gauge your creditworthiness by assessing how long you have lived at a particular location. In essence, living at the same address for more than 6 months is a sign of stability, and you are more likely to secure financial assistance for your vehicle purchase.
An Operational Phone Number
Having a working phone number might seem to be a simple requirement for an auto loan application. However, most people fall short when it comes to securing financing, for simply providing a non-existent phone number or a non-operational number during the loan application process.
As sensitive as providing your real number might seem to be, lenders want to know if the number is registered under your name. A working phone number also acts as a guarantee that you will not move your current address any time soon, making it easier for the lender to find you in case of any problem arises.
Your credit history plays a vital role in determining your eligibility for an auto loan. If you have a bad credit report, it might become a challenge to secure a loan. Thankfully, this is no longer the case. Most lenders are ready to provide loans to borrowers even if they have poor credit scores, by evaluating applications
individually and on a case-by-case basis.
However, the terms of the loan might be different for people with bad credit reports. For instance, you may have to pay higher interest rates or receive a lower amount to cover for the risks involved. In addition, the length of your loan may be shorter than the usual term limit.
Whether you have a poor credit score or an excellent report, paying a down payment can significantly influence your auto loan options. Lenders will be more willing to help finance your car if you are able to pay a down payment of 10% (or more) of the overall value of the vehicle. However, there is always the option for buying a car with nothing down, but it will come at a price.
A large down payment can significantly improve your chances of approval. In addition, it will lower the annual interest paid when settling your loan. For instance, if you take out a loan of $5,000 with a 10% interest, you will pay $500 as interest annually. Suppose you make a down payment of $2,000, you will only pay $300 as interest annually.
Other crucial requirements include:
- Debt to income (DTI) ratio that does not exceed 50%
Your debt to income ratio determines whether you will be able to sustain your monthly budget and still pay up your loan. To calculate your DTI ratio, you just need to add up your monthly expenses and divide the amount by your gross monthly income. This amount should not exceed 50% of your income.
- Payment to income ratio that does not exceed 20%
The payment to income ratio is the amount that remains from your monthly income after you have paid your monthly car and insurance payments. The essence of this ratio is to ensure that the car and insurance payments do not eat too much into your monthly income. To calculate this ratio, the lender will divide your estimated car payments by your monthly income. The amount should not exceed 20% of your income.
- When Should You Refinance Your Car?
- Why Should I Refinance My Car Loan?
- How Can I Remove a Cosigner from My Auto Loan?
- How To Transfer a Car Loan
- Blank Check Auto Loans – The Ins and Outs
Question: Are there a minimum and maximum limit to auto loan amounts?
Answer: Yes. Most lenders have limits to the amount of money they are willing to finance your auto purchase. The minimum normally ranges from $5,000 upwards.
Question: What is the maximum length of an auto loan?
Answer: In most cases, an auto loan cannot be longer than 7 years or 84 months. This is because most states have restrictions on cars that are older than 10-15 years.
Do you have a bad credit score? No problem. Securing an auto loan is now easier than you may think. All you have to do is to fulfill about ninety percent of the requirements and your dreams to own a car will become a reality, in no time!