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Banks and auto finance companies make loan approval decisions based on risk assessment. If they have reason to believe that a customer is likely to have problems repaying a loan, he or she is considered high-risk. The loan can be refused. Or it might be approved, but under special terms, such as a high interest rate, to compensate for the high risk. Getting approved for a car loan is easy if you meet the necessary qualifications. Let's take a look at what is typically required.
Age
State laws require that you be at least 18 years old to sign an enforceable contract such as a car loan agreement. A handful of states have higher age restrictions. Mentally Competency
You must be mentally competent to sign an enforceable contract. A person who is diagnosed as being mentally ill, mentally retarded, senile, or suffering from some other debility that prevents him from managing his own affairs may be considered mentally incompetent. Credit
Most lenders require that you have an established credit history to qualify for a loan. Credit cards or department store accounts that have been in use for at least six months will usually suffice, as long as payments have been made on schedule, and that account balances are relatively low compared to the credit limit on each account. If you don't have sufficient credit history, you may have to get a co-signer — someone who is willing to be responsible if you fail to pay on the loan. Credit Score
Assuming you have an established credit history, you must have a good credit score that indicates you have been prompt in paying your bills, have not defaulted on your credit accounts, and have not filed for bankruptcy. A credit score of 680-700 or above is considered "prime" and will allow you to approved for your car loan with a relatively low interest rate. Lower scores are considered "subprime" and will result in a refusal or a high interest rate, depending on the loan company and the value of your score. You can get your actual FICO credit scores at FICO Scores/Reports  . Income
Most auto finance companies like to see proof that you have an established income that will allow you to afford car loan payments. Typically, it's only necessary to show samples of recent pay stubs. In some cases, copies of the last couple of year's income tax forms may be required. Savings or Checking Accounts
Although not neccessarily a requirement, many lenders like to see a checking or savings account as further evidence of financial responsibility. Any other assets such as stocks, bonds, or home equity also helps. Debt to Income Ratio
It's possible to have a good credit history and a good income, but still be refused for a car loan if you have too much debt. If your total monthly debt, including a new car loan, exceeds 36% of your gross monthly income, many lenders will consider you as high-risk. They may approve you for a smaller loan amount, however. ### |
