Some people have enough money in the bank to pay for a vehicle outright. Maybe it was an inheritance, maybe they liquidated some assets, or they’re one of the proud few that worked hard and saved up for it. Either way, their case is not the norm, as 84.5% needed auto financing to purchase a car in 2013. This post is to help the majority understand how to navigate the murky waters of auto financing.
What does my credit score need to be to get financing?
The answer to this question varies. While you might see offers for “No Credit Check Financing”, almost all financing is based on your credit report. Because a credit report shows your history of making payments on time, lenders use your credit to calculate the risk involved with loaning you money. If you have a history of not making your payments on time, this will increase the lender’s risk of getting their money back, which will in turn increase the interest rate on the loan. While credit scores can range from 300 up to 850, it is generally agreed a score of less than 600 is considered bad credit. As a first-time car buyer you may not have a credit history, which can affect what type of loans are available to you. Because your credit score is such a pivotal piece of financing, it is a good idea to be aware of what is on your credit report. Annualcreditreport.com is a good resource for checking your credit, which allows you a free copy of your credit report once a year.
How much of a car payment can I afford? This is the bottom line question everyone wants to know.
However, the answer is: It depends.
Most banks will qualify your car payment as a percentage of your income. While conservative advice estimates your payment should be no more than 10% of your income, a bank will look at what is called your debt to income ratio. Your debt to income ratio is a calculation of your monthly payments divided by your monthly income. Most lenders like to see a total DTI of less than 40% (all of your expenses included), but there are other factors which could cause that number to increase or decrease.
It is important to know that to qualify for auto financing will need to document your income. This could be your most recent pay stubs if you are an employee, or possibly your tax returns if you run your own business. As a rule of thumb, the minimum income many lenders would like to see is usually around 1,5000 month to offer financing for your purchase.
Make sure to use our auto financing calculator to see how much of a car you can afford.
How long do you need to be on your job before you can finance a car?
Gainful employment can go a long way in helping you secure a loan for your new car. Steady job history can sometimes be used to counterbalance bad credit, even if your employment history shows some job changes. Generally, lenders want to see at least 6 months on the job but the industry standard is to request at least the last 2 years of employment. Job changes within the same industry can be looked at as continuous employment, whereas career changes and gaps of unemployment are looked at with more scrutiny, and could require an explanation letter.