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Make Sure You Have Good Credit
Having a good credit score is essential if you want to get approved for an auto loan with decent terms. In general, a good FICO® Score ranges from 670 to 739, and a higher score is even better.
Auto lenders typically use the FICO 8 or FICO Auto Score models to determine your score. Keep in mind, though, that lenders may have their own rubric for determining what they consider to be good or not. But if your credit score is at least in the good range, you’ll have a relatively good chance of getting approved.
Also, note that lenders may choose to approve you for a car loan even if you have a less-than-ideal credit score. But they may charge you a higher interest rate or require a cosigner with strong, established credit. Some lenders specialize in working with people who have bad credit scores, but these loans can be expensive, so it’s a good idea to work on improving your score before you apply.
Try Our Calculator For Yourself
If youve learned anything today, we hope its that its important to weigh all factors when buying a vehicle, either new or used. Our car financing calculator will be a great tool to help you plan your next vehicle purchase.
It can help determine how much money you want to put down . Based on how much your trade-in value is, it can be a great help when deciding what kind of term you want to choose. Note: some interest rates are term-specific, so even if your credit history says you can get 1.99% interest, for example, you may have to choose a certain term length in order to qualify for that interest rate.
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How Your Car Payment Can Keep You From Qualifying For A Mortgage
Under the above illustration, you’d qualify for a house that costs $61,000 . Do you see the problem?
It’s simple. There are very few places left in the United States where you can buy a house for $61,000. As of March 2020, the median sale price was $248,857, according to Zillow. A stiff car payment could be holding you back from qualifying for a larger mortgage. Without it, you’d qualify for a mortgage payment of $1,565 per month . $1,565 minus property taxes, homeowners insurance, and private mortgage insurance, leaves $1,074 per month toward principal and interest payments. That means you’d qualify for a house that costs approximately $169,000, which is much closer to the national median sales price.
How To Get A Car Loan
Buying a car is likely to be one of the biggest purchases you will make, after buying a home. So before you take out a car loan, it’s important to understand what you’re agreeing to, how your credit will affect your loan experience, and how an auto loan can influence your credit and overall finances.
For many consumers, casually stopping by the local auto mall can turn into making a big purchase. And while many people research their vehicle preferences before that first visit, fewer pay attention to the financing. Shopping around for an auto loan before taking a step into a dealership could significantly save you money and even help you get more car for your money.
To get an auto loan with the best possible rate, it’s important to know where you stand financially and what to look for when comparing loan offers. Read on to learn how to find an auto loan that will put you in the car you need , while also helping you build credit and stay financially stable.
Have A Source Of Income
Having a steady income is important to auto lenders because it improves the likelihood that you’ll make your monthly payments. Depending on the lender and your job situation, you may need to provide one or more forms of documentation.
If you’re a W-2 employee, for instance, a recent pay stub or a W-2 form may suffice. If you’re self-employed or receive Social Security or other similar forms of income, however, you may need to provide bank statements.
Speak with the lender early on in the process to talk about your situation and find out what documents you need to avoid prolonging the process.
Check Your Credit Scores First
Before making a major purchase, it’s a good idea to check your credit reports and scores at least three to six months prior to your planned purchase.
The credit score needed to qualify for a loan will vary depending on the lender, since they will each have different criteria to grant you a loan and may use different credit scoring models, such as the FICO® Auto Score 8, which has a score range between 250 and 900.
Some lenders specialize in approving loans for those with lower credit scores. These can come with higher interest rates and less favorable terms. For example, if you wanted to purchase a car for $30,000 with an interest rate of 11% on a five-year loan, you’d pay $9,140 in total interest. With the same loan amount and term length, but with an interest rate of 4%, the total amount of interest you’d pay would be $3,150just over a third of what you would pay at the higher rate.
How To Get A Car Loan With Bad Credit
If your credit report contains some negative information, or your credit score is not as high as you would like, consider taking steps to improve your credit before applying for an auto loan. Improving your credit can boost your chances of qualifying for an auto loan at a good rate and terms. Steps you can take to improve your credit include:
- Bringing any late payments or collection accounts current.
- Paying all your bills on time every month.
- Paying down existing debt to improve your , which compares the total amount of credit you have available with how much of it you’re actually using.
If your credit reports and scores are poor, and you can’t afford to wait to get a car, it may still be possible to get a car loan. However, be aware your loan will likely have a higher interest rate than what’s offered to people with good credit scores.
You can offset the impact of poor credit by saving up for a bigger down payment. The down payment will reduce the amount you have to borrowand the amount of interest you’ll pay over the life of the loan. Plus, lenders may view your down payment as evidence you know how to manage money and will likely repay their loan.
You can also ask someone with good credit to cosign for a car loan. When you have a cosigner, that person’s good credit will influence the interest rate and terms the lender offers. However, your cosigner will share responsibility for repaying the loan, so it’s important to ensure you make all payments in a timely manner.
The Term Of Your Car Loan Should Be No More Than Four Years
The longer the term of your loan, the more interest you pay. The longer your loan term, the longer youll have to meet your lenders insurance requirements, which often means higher rates.
Plus, by the end of four years, your car will have lost a lot of its value, and you wont want to still be paying it off.
Four years is the maximum most personal finance experts recommend. If you can swing paying off your car in three years, thats even better. If you feel you absolutely must stretch your payments further, you could get a five-year loan, but never longer.
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There Is No Standard Threshold Foir
The threshold ratio may vary across banks and may not even be disclosed. As I understand, not many banks would be comfortable once the FOIR breaches 50%. However, it is possible that banks may make exceptions for very high income or high net worth individuals. And I can see reasons for the same.
Lets consider an example. Ashish earns Rs 50,000 per month and Ramesh earns Rs 5 lacs per month. Neither has any loan. You can expect fixed expenses to be a fairly high portion of Ashishs monthly income. The same cannot be said for Ramesh. At such high level of income, he may be saving much more . Therefore, it is possible that the bank may restrict Ashish to a FOIR of 40% while it may go up to 60% for Ramesh.
A similar argument can be extended to High Net-worth individuals. Note that this is a conjecture. Banks have different policies for determining loan eligibility.
Whats The Ideal Credit Score For A Car Loan
Auto-loan lenders look for a borrower with a credit score in the mid-600s in Canada. A credit score between 630 and 650 is generally what lenders want to see.With this, there is some leeway around your credit score requirements when looking to obtain a car loan. Dependent on your lender or bank, sometimes they will be stricter and look for higher credit scores. At the same time, alternative lenders are often willing to accept lower credit scores. Some dealerships can also help borrowers find financing to meet their specific credit needs.
If your credit score is below 630, dont stress! You can still obtain a car loan. When youre shopping around, its important to keep your mind open to the idea your loan may cost a little more. It can take some time to find a lender that will work your low score. Find out more on obtaining a loan with bad credit here.
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Finding A Car You Can Afford
Many automotive sites, such as Kelley Blue Book, Edmunds and AutoTrader, have car finder search tools to show you different models listed by price. But remember to set the bar low. When searching for cars, set your maximum price below the total loan amount you think you can afford. Sales tax and fees can easily add up to an extra few thousand dollars.
About the author:Philip Reed is an automotive expert who writes a syndicated column forNerdWallet that has been carried by USA Today, Yahoo Finance and others. He is the author of 10 books.Read more
Get Preapproved For A Loan
Once you land on a lender with terms youre comfortable with, another good step is to get preapproved for the loan. This just means that the lender has given you a quote for the loan, which typically includes the loan amount up to a certain dollar amount. But remember a preapproval is not a guarantee. Note that when you get a preapproval letter, the lender will usually check your credit, which can result in a hard inquiry.
If youre preapproved for a loan, the lender will typically give you a preapproval letter to take with you when you go car shopping. Then when you settle on a car, you may be able to use that preapproval as a bargaining chip. Ask the dealer: Can you beat this financing? If it cant, then at least you know youve got another loan to consider.
If getting preapproved for a loan makes you leery, know this: Car loan preapproval doesnt actually mean youve signed up for the loan. You can choose to apply for the car loan or not its your choice.
Similarly, you dont have to take out a loan for the full amount your preapproved for. If you find a car youre happy with for a lower price, then by all means you can apply for a smaller loan.
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Why An Auto Loan Calculator Is Important
If youre planning on financing your new vehicle purchase, the overall price of the vehicle isnt really the number you need to pay attention to. The most important number, for you, is the payment. Because, as our auto loan calculator will show you, the price you ultimately end up paying depends on how you structure your deal.
The factor that will change your monthly payment the most is the loan term. The longer your loan, the less youll pay each month, because youre spreading out the loan amount over a greater number of months. However, due to the interest youll be paying on your loan, youll actually end up spending more for your vehicle by the time your payments are over. Why? Because the more time you spend paying off your loan, the more times you will be charged interest.
Speaking of interest, the interest rate is the second most important number to consider when structuring a car loan. The interest rate is the percentage of your purchase that is added to the cost of your vehicle annually. So, if you buy a vehicle with 4.99% financing, then youre paying roughly 5% of your vehicles overall price in added interest every year.
Next, consider how much your vehicle is worth if youre trading it in. If youre trading in a vehicle thats worth $7000 and youre buying a vehicle thats worth $22,000, then you will only have to take an auto loan out for $15,000 .
Use Your Loan Offer To Set Your Budget
Your preapproval offers will state the maximum amount you can borrow, but thats not the price of the car you can buy. You should allow an additional 10% to cover taxes and fees. Use an auto loan calculator to design your loan. Put in your down payment, trade-in value of your current vehicle and lending terms to find the right monthly payment that fits in your budget.
If that payment is too much for your comfort, remember that the preapproval offer is just a limit you can borrow much less if you choose. Its far more important to be able to make your loan payments comfortably, even if the bank says you can afford more.
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Monthly Payments Should Be Less Than 10
I used the neuvoo income tax calculator to figure out that a $50,000 salary means you take home $38,869. If we calculate 15% of that take-home pay, we end up at $5,830.35 or car payments of $485.86 per month.
If you want the best car you can afford at that salary, you could buy a $30,000 car, put a $6000 down-payment, get a 5-year loan at 4% interest and end up at monthly payments for 5 years at $442.
But, you still need to compare car insurance plus evaluate the gas mileage and maintenance costs of your new vehicle. If youâre setting aside $100 per month in maintenance, $200 for gas, $200 of insurance, and $50 in parking fees â youâre spending almost $1000 per month to drive a vehicle.
That $100 transit pass might not look so bad anymore.
If weâre staying with above example, at about $1000 per month on your car, youâre left with $26,869, or roughly $2,200 a month, for rent, groceries, clothes, dining out, tax free savings accounts, GICs, etc. for 5 years.
Increase Your Chances Of Getting Approved
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