Auto Loan Approval Criteria

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One of the first big purchases many teenagers, or young adults, make is a car purchase – whether it’s new or used. If you’ve stayed on top of your credit by starting to build credit at 18 then you’re already in a great spot to get approved for an auto loan. Don’t let many lenders and dealers fool you, you can still get approved for an auto loan with bad credit or no credit history at all – it’s just a bit harder.

Before you go looking for that auto loan, make sure you know what criteria lenders will look for when you apply. Making sure you understand the difference in the credit score you see and the one the lender sees is a big component.

Income Requirements for Auto Loan Approval

The basic income requirements for auto loan approval is for you to have a gross (pre-tax) monthly income of at least $1,500. Obviously the more you make the more they’ll consider lending to you since they know you can pay. This doesn’t mean just because you state you make that much you get a pass – they will check. They will verify your income and calculate your debt to income ratio to figure out a potential payment you can make to see how your monthly finances will hold up.

Employment Requirements for Auto Loan Approval

It’s pretty obvious that having a full-time job will give you the best chances versus having a part-time job. Some require more time on job than others, however, lenders like to see that you’ve received the above income and passed their income requirements for several months.

Age Requirements for Auto Loan Approval

You have to be 18 to sign an auto loan to receive the car, even if your parent cosigns. Anyone that is 17 and under is still considered a minor in the United States and they cannot enter a contract. If you are approaching the age requirement for an auto loan and have little to no credit – speak with your parents. If you know you’ll satisfy the other basic requirements for an auto loan they may be willing to cosign for you.

How Your Credit Score Can Impact Your Interest Rate for a Car Loan

Your credit score is what defines the interest rate that you’ll be given when you apply for an auto loan. It may be shocking but even just a few points in either direction can change how much interest you’re charged each month.

Here is a sample chart of how you credit score can affect your interest rate:

Credit ScoreTypeAvg. Rate New CarAvg Rate Used Car
781-850Super Prime2.5%3.5%
300-500Deep Subprime13.5%19%

As you can see – the higher your credit score the better rates you’ll be given. You can also see that the worse your credit is the worse your used car interest rate will be when approved for an auto loan. There are a few reasons for this but the biggest one is that there is less of a return on investment in the car. If you were to default on the loan or something were to happen to the car, the lender wants to make sure they’ll get their money’s worth. Whereas if you were to buy a new car you can see there is about a 6% difference in the rate because of the value of the car. If the lender has to repo the car they’ll likely make their money back.

The credit score you see may not always be what the lender sees. They may pull your score and report from a bureau that you haven’t pulled from. The main score they use is your FICO score. However, this score is calculated differently for each major credit bureau. There are also “auto-enhanced FICO credit scores” or just auto credit scores that lenders often use, which are geared specifically towards auto financing. Whenever you use a “free credit score service” you are seeing your Vantage score which is not your actual FICO score and your real FICO score can either be higher or lower by up to 20 points, more or less.

Down Payment Requirements for Auto Loan Approval

Using a down payment on an auto loan is actually a great indicator that you’re invested in the car you’re about to purchase. This is highly important to lenders and often the first sign of reducing your risk that the lender attributes to you. It also reduces the overall interest and amount you’ll owe at the end of the loan by quite a bit over time, depending on your interest. It is advised to put as much down as you can without putting yourself in financial strain.

However, the basic down payment requirements to get an auto loan usually are $1,000 or 10% of the car loan – whichever is less. If you offer the dealer less than this you are usually getting the worse end of the deal and Teen Finance Tips advises against that. You should always consider placing a down payment on your auto loan. Most lenders don’t have a down payment limit but they may stop you from putting too much down as they won’t make any money. You may be able to take advantage of other things to improve your chances and down payment like: cash incentives or a trade-in vehicle. If you have a trade-in you’ll need to get it appraised, however, this is a common way a lot of people place a down payment on their new car.