3 things That Determine If You Get Approved Or Not For A Car Loan?
How does one know if they will get approved for a car loan or not? No one likes the process of exposing all their very personal information and getting declined so I thought I would share the info that lenders look at when determining whether to approve, decline, or condition the loan.
- Debt/Service Ratio
This is how a bank determines if you can afford the monthly payment you are applying for. A debt/service ratio number is your income minus your expenses. To be approved automatically, one shouldn’t haven’t more than 40% of their gross income committed. This is because the 60% of income gets used up for taxes, food, personal care, etc. From the 40%, your monthly rent/mortgage and any other loans such as credit cards, lines of credit, car insurance, are deducted. As long as the number at the end of the math is higher than the car payment being applied for, you should get approved. Here is an example:
Gross Income – $50,000/year
Rent – $650/month
Student Loan – $300/month
Credit Card – $150/month
Applying for 2015 CR-V with $390/month payment
$50,000 x 40% = $20,000/year = $1667/month.
$1667 – $750 rent – $300 student loan – $150 credit card = $466Conclusion: the end number more than the car payment. APPROVED!
- Past Credit History
This should be pretty straight forward. If you have a history of borrowing money and paying your bills on time, your more likely to get approved and will have a higher beacon score. Scores typically range from 400 to 900, and good scores are typically 600 and higher; anything over 750 is considered excellent. With a high credit rating, lenders may even make exceptions on their standards for debt/service ratio and down payment. With a low rating, lenders may ask that you have a substantial down payment or co-sign the loan with someone who has a high rating. Funny fact – bad credit is better than no credit at all. So if you currently don’t have a credit card, you would be wise to get one.
- Down Payment
With cars being a depreciating asset, lenders take the risk of an applicant not paying their monthly car payment and being forced to re-possess the vehicle and sell it off at an auction or to someone else for less then the balance on the loan. A down payment on the loan will lessen the risk to the lender and make an approval easier. A down payment isn’t always necessary, but is always a good thing. With a poor credit rating, lenders may require money down.
Tip you should know:
Student Plan: Many new vehicle manufacturers will have a program where students who will be entering the work force and maybe don’t have the incomes or money saved up yet to satisfy some of the requirements can get approved. By supplying a transcript of a recently completed college diploma or degree for an in demand field of work, you may be in luck.
Hope this gives you some knowledge on the subject. If you are considering leasing/financing a car, give me a call. I’d love to help.