Interested in a car loan? We'll go over all of the basic auto loan eligibility requirements that you will want to be aware of before applying.
Before we dive into this, we want to remind you of one thing: if you are planning on working with Auto Credit Express, keep in mind that we are not a lender. Our business matches consumers with local special finance car dealerships.
This means you will be working with dealers and the lenders they are signed up with. So, keep in mind that the requirements we cover in this article can vary depending on the standards of the lender in question.
Requirements For A Car Loan
Let's start with the basic requirements to qualify for an auto loan. Again, you need to realize that there are no universal standards that all lenders stick to. These are simply the typical qualifications for many of them. They include a minimum monthly income, a minimum age of eligibility, current legal residence status (US or Canada), a valid driver's license, and full coverage insurance.
Additionally, you will be asked for an address, employment, and income information. If you have bad credit, you will also need to show proof of this with the appropriate documentation, such as pay stubs for income verification and a utility bill addressed to you for residence verification.
Age Eligibility For a Car Loan
You must be 18 years of age or older. It's the minimum legal age for obtaining a loan in the United States or Canada and you can't enter into a legally binding contract before this time.
Credit Score Required For a Car Loan
It's important to know your credit score and be on top of your credit reports. There is no set-in-stone credit score number that will automatically get you approved. Each auto loan application is evaluated individually, based on a person's credit merits and equity position. Typically, the cut-off for "good credit" is seen as a credit score of 670 or better. Anything below this may require a special finance lender to help with the situation.
However, lenders decide their own acceptable level of risk they are willing to take on. Because it varies, it's hard to definitively say what constitutes a "subprime" or "bad" credit score. Your credit score and background largely determine if a certain lender can work with you, sets the amount you're approved for, and plays a factor in determining your interest rate.
Income Requirements For a Car Loan
A gross monthly Income of at least $1,500 to $1,800 is typically required. Car ownership costs are the second-largest household expense in the U.S. after home payments. That's why lenders are typically only going to work with you if you make at least $1,500 a month pre-taxes. The more you make, the better your chances of auto loan approval will be, however, it's not just about what you make, but how you earn.
Lenders are typically looking for a borrower who has a steady income and has been at their current job for at least six months to a year. The more job stability you have the better off you are when borrowing. If you only work seasonally or work multiple part-time jobs it may be more difficult to get approved for financing.
Debt-To-Income Required For a Car Loan
In addition to earning a certain level of income, you have to "debt out." This term refers to lenders calculating your debt-to-income (DTI) ratio. Because they don't want to approve applicants who can't afford a car loan, lenders will put a cap on how high your DTI ratio can be. While it varies, the limit on debt is typically around 45-50% of your total income.
Lenders and dealers look at your debt-to-income ratio. To calculate your DTI ratio, add up all of your monthly bills and divide that number by your monthly pre-tax income. After factoring in a potential car payment, most lenders and dealers prefer to see your DTI ratio at 45% to 50% or less. They also look at your payment-to-income (PTI) ratio. Most providers prefer that your potential payment, including auto insurance, is no more than 15% to 20% of your income.
Time on the Job Requirements for a Car Loan
Time on the Job. When trying to extend bad credit loans, lenders look for stability anywhere they can. A stable employment situation shows that your income is steady and that you have the ability to pay back the loan. As a result, applicants who've been at their current job for at least one year are viewed more favorably. If that isn't the case for you, this doesn't mean your application is dead on arrival. It just means that you may have to explain your situation when given the opportunity.
Documents Required For a Car Loan
You must prove your information. You will be asked for an address, employment, and income information. If you have bad credit, you will also need to show proof of this with the appropriate documentation, such as pay stubs for income verification and a utility bill addressed to you for residence verification. In addition to these documents you are also typically asked to provide proof of a working phone in your name, a list of five to eight personal references, and proof of insurance.
Down Payment Requirements on a Car Loan
A minimum down payment is required. Most bad credit auto loan programs require some form of a down payment. This can be in the form of cash, equity in a trade-in, or a combination of the two. If you don't have one, many of the available lenders will be unable or unwilling to work with you. A down payment is very important for the success of your loan. Paying money down helps you build equity in the vehicle, reduces the total amount of interest charges you pay, and can also allow you to shorten the loan term.
The standard down payment amount to strive for with bad credit is at least $1,000 or 10% of the vehicle's selling price. The more money you can put down, however, the better off you'll be with your loan.
There will also be loan guidelines you'll have to stick to. These will vary based on the lender's policies.
- Amount Financed. Most lenders have both a minimum and maximum limit they are willing to finance. Typically, the minimum is around $5,000, while the maximum varies widely from lender to lender.
- Term Limitations. Lenders will also have their own rules regarding the length of your loan. Generally, the term will need to be at least 36 months (three years) and can be no longer than 84 months (seven years). Term limitations can vary depending on the age and mileage of the vehicle being financed, as well as other factors.
- Loan to Value Restrictions. Auto lenders will also restrict the maximum loan-to-value (LTV) ratio they will accept. The LTV ratio is the amount financed relative to the value of the vehicle. The maximum LTV ratio lenders accept typically ranges from 120% to 150% of MSRP or retail value. Check out how you can take action to lower your loan-to-value ratio and help your approval chances.
Lenders have rules when it comes to vehicles they are willing to finance. Again, you won't be able to find a comprehensive guide on the web because different lenders have different standards. For most lenders, vehicles older than 10 years will not qualify for financing. They also won't accept cars with more than 100,000 miles on the odometer, regardless of the model year.
Being an Informed Consumer
Shopping for an auto loan can be daunting, and we can't stress enough on how important it is to be an informed consumer. That's why our website is chock-full of useful tools and resources for your benefit.
You can get a rough estimate of how much you may be approved for with our Approval Amount Calculator. With our Monthly Payment Calculator, you can get a feel for how much your monthly installments will be. Stay informed and in control to make the auto loan process less stressful for you.
Auto Credit Express can help you find a car loan if you have good, bad, or even no credit. Plus, our service is free and it doesn't put you under any obligation to buy or do anything.
Get started right now by filling out our simple and secure car loan request form. It only takes a few minutes of your time and the sooner you apply, the sooner you can be driving off in your next car.