When you take on an auto loan, there are many factors that go into proving you're worthy of taking on a large debt. To this end, lenders require you to prove your ability, stability, and willingness to take on a loan. They do this by requiring you to bring in proof that you are who you say, make what you say you make, and don't already have too many bills compared to your income.
We will go over the basic car loan requirements, like having a decent credit score, and proving your income. Here's what we know.
Requirements For A Car Loan
Car loan requirements are factors you have to show a dealership or lender before they will consider granting you a loan, like an auto loan or a home loan. These requirements show the lender your ability to take on a loan, your current situational stability, and your willingness to repay a loan.
Minimum Credit Score for a Car Loan
There is no set minimum credit score to purchase a vehicle, though lenders typically prefer borrowers with better credit. 670 is generally seen as the line between good credit and poor credit, so if you're credit score is lower than 670, you may need to seek a special finance dealership that is qualified to deal with unique credit situations. Not all lenders work with bad-credit borrowers.
Income and Employment Requirements for Car Loans
You can't take on an auto loan without a way to repay it, so lenders have specific requirements for income and employment. This ensures that you can continue to make your payments into the future.
Most lenders require you to prove you have steady employment, which you can do by providing 30 days of check stubs, including year-to-date income. This shows a lender that you have stable employment, and allows them to calculate your debt-to-income ratio, which is an important part of the car loan process for lenders.
Most lenders prefer a minimum income of between $1,500 and $2,500 a month to begin the car loan process. Making less than that could make it difficult to make your loan payments on top of all your other bills.
Down Payment Requirements for a Car Loan
Down payments are an initial out-of-pocket payment that shows the dealer and lender your willingness to take on an auto loan. The standard minimum amount you're required to provide varies by situation.
If you have good credit, you may not be required to make as large a down payment as someone who is struggling with credit issues. However, it's recommended to put down at least 20% of the vehicle's selling price if you hope to beat depreciation and avoid negative equity.
With bad credit, it's a different story depending on the lender you're working with. Some traditional lenders may require a larger down payment to work with a bad credit borrower, while special finance dealers may only require $1,000 or 10% down, whichever is less.
Debt-to-Income Ratio (DTI) and Car Loans
Your DTI is just one of the equations a lender uses to determine if you have enough disposable income to take on a loan. This ratio compares your existing bills to your gross income amount, letting the lender see if you have more debt or more income.
To calculate this yourself, simply add together all your monthly bills and divide that total by your gross monthly income before taxes. Then, multiply your answer by 100 to convert it to a percentage.
Here's an example:
If you add up all your bills, including rent, mortgage, utilities, loan payments, and credit cards, it comes to $846 a month. Your pretax monthly income is $2400.
- 846/2400=0.3525
- 0.3525*100=35.25%
- Your current debts use just over 35% of your income
In this scenario, you're in a pretty good position to borrow, since most auto lenders cap your DTI at 45%. This means that if your current debts use more than 45% of your income, you won't qualify for a car loan.
Car Loan Terms and Conditions
When you're taking on a car loan, there are certain conditions that must be met. Not every vehicle can be purchased with a loan, especially some used cars. Typically, a vehicle must be no older than 10 years and have less than 100,000 miles on it to meet loan requirements.
Lenders don't usually finance vehicles that are older, high-mileage, or damaged in any way. This means the car must also have a clean title, not a salvage or rebuilt title. Additionally, lenders don't typically lend less than $5,000 for a vehicle, so your loan amount must be at least that much after taxes and fees.
Car Loan Requirements for First-Time Buyers
First-time car buyers may need more proof of things like credit history or stability, since a lender can't look at their credit report and see how they've handled credit in the past. Because of this, a first-time buyer without established credit may need to visit a subprime lender who is versed in dealing with people who have little to no credit.
In order to determine if you're eligible for a car loan, first-time buyers who visit a special finance dealership will need to provide the same information that a bad credit buyer would, in order to show a lender that you're serious about taking on a loan.
These requirements may include:
- computer-generated check stubs showing year-to-date income
- a valid driver's license
- proof of residency with a utility bill in your name
- a list of five to eight personal references
- proof of a working telephone in your name, prepaid is not allowed
- a down payment of at least $1,000 or 10% of the vehicle's selling price
FAQs
How does my debt-to-income ratio affect my car loan approval?
If you have more debt than income, you are already over-stretched, and you don't have room in your budget for a vehicle loan. Your DTI tells you how much debt you're carrying compared to how much gross monthly income you have. If this ratio shows that more than 45% of your income is already spoken for each month, you're not likely to qualify to take on more debt, especially a loan as large as a car loan – the second most expensive thing borrowers finance next to a home.
Can I get a car loan if I’m self-employed?
Self-employed persons can qualify for an auto loan. But they may require more proof of income, such as 2 to 3 years' worth of tax returns to prove their income. Since you aren't paid by someone else, the lender will need other ways to verify your income to ensure you can repay the loan. Tax statements, in conjunction with your most recent bank statement, are usually proof enough for the lenders.
What is the minimum down payment for a car loan?
The minimum down payment for a car loan is different in each situation. Typically, bad credit car buyers need to put down at least $1,000 or 10% of the cost, whichever is less. The general recommendation is to strive to put down at least 20%, though, if you plan to curb depreciation and avoid negative equity.
What documents do I need to apply for a car loan?
There are plenty of documents you need to bring with you when you apply for a car loan, including but not limited to a copy of your driver's license, proof of valid insurance, proof of a working phone in your name, a bill or other official piece of mail like a bank statement, which shows your address, a computer-generated check stub showing ytd income, and a list of five to eight personal references, with phone numbers and email addresses.
