Minimum Loan Amount

What is a Minimum Auto Loan Amount?

A minimum auto loan amount is the least amount of money a lender will approve for a loan. The minimum auto loan amount can vary depending on the lender you're financing through, but $5,000 is a typical standard, especially for dealer financing options or bad credit borrowers who need subprime loans.

This isn't a hard and fast rule, and you may find loans, especially through a direct lender like a credit union, that aren't required to be as much, or ones through a bank that require much more. Credit unions may have loans starting at around $2,500 or less, while lenders like banks have minimums as high as $7,500 to $10,000.

This means that you can't get a car loan for less than this amount. The vehicle you're buying doesn't have to cost this much; you just can't borrow less, so the vehicle with taxes, title, license fees, and any additional dealer fees rolled in must meet the minimum.

Why Do Lenders Set Minimum Loan Amounts?

These minimums exist to help lenders be profitable. If a loan is too small, the interest collected on it may not be sufficient to cover the service fees and other costs that providers incur when lending money to the public. Like all businesses, if they're not profitable, they can't continue to stay in business, so lenders need to make money, too.

Additionally, lenders like to keep loans within the bounds of the vehicle's value. Lending too much or too little compared with the vehicle's value means a lender can't recover their losses with the vehicle if something goes wrong. Lenders typically cap LTV at around 120%, which means that the loan you receive can't be more than 20% higher than the value of the vehicle. They do prefer to keep an LTV low, if they can, so it's not uncommon for a loan to only cover 80% of the vehicle's value. This is usually true for bad credit borrowers, and a larger down payment may be required to make up the difference.

Factors Influencing Minimum Auto Loan Amounts

Several factors influence the minimum loan amount a lender offers you. Most importantly, it is the lender's individual policies and requirements. When you're working with a third-party lender or dealer financing, you're likely to have a set minimum loan amount of around $5,000. However, there are several factors about your situation that could impact what your minimum loan amount will be.

One big influence, not just on your minimum loan amount, but on your overall approval, is your credit score. The better your credit is, the more auto loan opportunities you will have. This generally means consumers with a credit score of 670 or higher on the FICO credit scoring model will have an easier time with vehicle loan approval. Consumers with lower credit scores may need to seek the services of a subprime lender through a special finance dealership to be considered for a bad credit car loan.

Other factors that impact loan amount are the vehicle type and value of the car you're purchasing. If you're purchasing a low-priced vehicle that is far below the minimum threshold of the lender, you may not be able to qualify for a loan at all. Additionally, you typically can't borrow more than the value of the vehicle you're financing, so if you're asking for a $7,500 loan from the bank but the vehicle you want is only worth $6,000, you're only likely to be approved for the vehicle's value or less, which means needing a down payment to make up the difference.

Older, high-mileage vehicles may also impede your ability to get a car loan, even one with a minimal amount. This may seem counterintuitive, but a lender wants to sell you a good car, and they don't want it to break down before you pay off the loan. That's one reason these types of vehicles may be harder to finance – they pose a great risk of mechanical issues if they're very old or have a lot of miles on them.

How to Qualify for an Auto Loan with a Low Down Payment

If you're looking for a smaller auto loan and don't have a lot saved up for a down payment, you may not have to worry. Your down payment amount typically has to do with the amount of the vehicle, your credit situation, and the requirements of the lender or dealer you're working with. In the case of bad credit borrowers working with a subprime lender, you're typically required to provide at least $1,000 down or 10% of the vehicle's selling price, whichever is less. This rule can vary, though, so be sure to talk numbers with the dealer before you agree to a loan.

Here are a few tips on qualifying for an auto loan if you don't have a large down payment:

• Use a cosigner. A cosigner can improve your chances of being approved for a car loan, especially if you're struggling with credit issues or don't have a lot of money to put down. A cosigner is someone with better credit than you, who can help you get approved by signing the loan alongside you. As a cosigner, they agree to make payments if you cannot, and the lender will take their good credit into account when considering your auto loan request. They don't have any right to the car, though, and are taking a big risk to help, since your actions on your loan will also impact their credit.
• Improve your debt-to-income ratio. DTI is one of the factors that lenders look at when they're considering you for an auto loan. Lenders prefer that your DTI is below 36%, but typically cap your DTI at 43%. If your current bills take up 50% or more of your pre-tax monthly income, you're not likely to get approved for a loan, even one with a small minimum loan amount. To improve your DTI, pay off small outstanding debts to make way for your anticipated car loan.
• Make the biggest down payment you can, even if it's not as much as you wish you could. Any down payment you can make shows your willingness to invest in your own success, and that's always favorable to a lender. When you're struggling with lower credit scores, you're typically required to make a down payment, but the amount will vary.
• Rate shop for the right lender. When you're struggling with credit, it's important to get the right loan. This means doing your homework and not jumping at the first loan you're offered. It's a wise move to compare rates and terms between a few types of lenders to see where your best options are. Check with credit unions, special finance dealerships, and buy here pay here lenders for a better chance at approval. Rate shopping requires that you apply for multiple loan quotes in a short amount of time so that lenders and credit bureaus can see that you're legitimately seeking a loan, and not just casually looking at rates. The rate shopping window is typically 14 to 45 days. If you make your inquiries within that timeframe, your credit score should take less of a hit and bounce back more quickly than if you were to space out your loan requests over several months.

Alternatives to Traditional Auto Loans

If you have poor credit and you need an auto loan, there are a lot of strategies you can employ to improve your chances. The best way to do so, though not the fastest, is to bring up your credit score. The higher your credit score, the greater your chance of being approved for a car loan.

If improving your credit isn't in the cards right this second, using a cosigner or co-borrower with better credit could be a solution. A cosigner lends you their good credit and acts as a backup payer for the lender's peace of mind. They don't get any rights to the car. A co-borrower, on the other hand, is someone who jointly owns the vehicle with you. In both situations, both parties need to meet the lender's qualification guidelines for the situation.

If a minimum loan amount is getting in your way when you're trying to finance a low-priced vehicle, it may be worth it to save up and make the purchase in cash. Be sure to account for the additional taxes and fees that may still be part of your total cost.

If a cash purchase isn't the way to go, but you aren't able to finance through a traditional lender, a buy here pay here dealership may be the way to go. These dealerships don't rely on third-party lenders, and the dealer finances the vehicles themselves. In these cases, you may be able to get a smaller loan, but beware, since your interest rates are likely to be much higher than other types of financing, and may require a larger down payment.