So you’re thinking of buying a new car. You may want to consider car financing options such as automotive loans. While taking out a loan to buy a car is great, this option limits the amount you can ask from a lender based on your credit score rating and income.
Here’s how a car loan works: If you are cash-strapped and are unable to purchase a car, or rather if you don’t have the cash to pay for a car in one fell swoop, you can borrow money and pay off the loan (with interest) on a period the lender decides on.
But it’s the lender who’ll ,in fact, determine how much you can borrow. Why? Because a) the final decision rests with them, and b) it is one thing to wish you’d pay a given amount, and to actually pay altogether for the auto loan.
You may be eager to repay the auto loan in spite of your bad credit history. But if you can’t afford to pay it back, chances are slim your loan application will get approval. It’s that simple.
What Exactly Do Lenders Look Out For?
Lenders look into your credit score rating as well as your monthly income prior to approving your car loan. Your credit score is a key factor in whether a lender will approve your car loan application or when you apply for refinancing an investment property as it provides a summary of how reliable a borrower you are.
If you ever defaulted on a loan or delayed making timely payments on a loan before, chances are you’ve lowered your credit score already. You’ve also lowered your chances of securing an auto loan.
Your yearly income matters a great deal, too. Having a reliable income means you have a stable job. The lender often sees you as an individual likely to pay off a loan in a timely fashion thus eligible for a higher amount of loan. So, there’s a certain amount of loan that can’t be approved if your income is below a certain level.
But what a lender is really interested in – of course, besides your income and credit score – is how much money in a percentage goes into repaying your debt (or DTI). The said amount is the final determinant to getting your loan approved.
If your DTI ratio falls at 40% or less, lenders will even smile while approving your loan. That’s because they’re interested in minimal ratios on a borrower. Put it another way, if your monthly income averages $8,000, make sure your loan repayments don’t exceed $3,000. That way, you’ll please your lender.
Debt payments could be anything including personal loans, student loans, car payments, and even mortgage payments and rent. Groceries are not counted as debt payment as well as your utility bills. Also thrown into the picture is your monthly credit card payments.
What Lenders Actually See When They Look at Your DTI Ratio
When your ratio falls around 36% or less, you are considered an ideal borrower who is likely to pay off the car loan in time. In other words, you can afford to pay the loan.
- For borrowers whose DTI ratio falls between 37% and 42% are considered borderline high. That means, they have a debt load that is average and is likely to get their car loans approved.
- But if your DTI ratio falls between 43% and 49% a lender considers lending you money a risk on their part. You’re viewed as having financial problems unlikely to dissipate unless the debt is repaid.
- If your debt level is below 50% lenders won’t touch you with a 10-foot pole. They will focus on reducing your debt immediately if at all they ever approve your auto loan application.
One thing to note, though. Your DTI ratio doesn’t matter if you possess an attractive credit score rating. And a sustainable – and reliable – income to boo. Put it simply, lenders won’t give a hoot on how much you want to borrow if you have high monthly income (approximately $7000 a month).
Those with a large down payment that average more than 50%, and also those with at least average income of $3,000 a month, have a higher chance of getting their auto loans approved. On the flipside, an unpleasing credit score rating screams bad debt.
Hence unlikely for your automotive loan to get approval from your lender any time soon. This, however, doesn’t spell doom for you. There are other viable payment options you can go for.
Loans You Can Get Approved for Depending On Income and Credit Score
- Credit score of 720 and above – 30% of your monthly income should go into repaying off your auto loan debt. The maximum time for loan payment is 60+ months based on your income.
- Credit score of 640 to 720 – Make sure your DTI ratio is above the 50% threshold. And 20% of your monthly income goes into repaying your loan – with a maximum loan term of 60+ months.
- Credit score of 590 to 639 – Maximum DTI ratio shouldn’t fall below the 45% mark. With 17% of your monthly income going into paying off your debt. And 48 months as the loan term.
- Credit score of 530 to 589 – Maximum debt-to-income ratio shouldn’t go below 40%. 15% of your monthly income should go toward paying off your loan debt. With 36 months as the maximum loan term. Individuals with this credit score get limited loans of up to $6,000.
- A credit score that is below 530 – Maximum DTI ratio shouldn’t dip lower than 35%. With 15% of your income being the debt payment amount. The maximum loan term is 24 months. Lenders limit loans to individuals with this credit score to a maximum of $5,000.
Different credit scores have different payment methods or loans they can qualify for. However, make sure to determine your actual credit score before anything else.
Once this is out of the way, ask say an online lender what loan amount they’re willing to offer. Online lenders are a dime a dozen these days. Find an ideal one that suits your needs.
In other words, you can have bad credit but still, be eligible for a loan to get your dream car. If your credit score falls within the required threshold, then lucky for you. If your credit score has an error, request for a credit report to help fix the problem.
If you decide to take out an auto loan today, make sure you have a sustainable disposable monthly or yearly income, and of course, a good credit score rating. These two are the key determinant to whether your auto loan will get approved by a lender.
But most importantly remember that your debt-to-income ratio matters as well. You cannot overstate its importance, in fact. Because it could mean driving away in your dream car sooner if it is 40% or less.
You should know despite your credit score or income levels you can still get financing quotes from different lenders. Make sure to compare the figures above to ensure where you exactly fall, and how much you need to borrow in regard to debt payments you make each month.
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