Your lack of a vehicle may hamper your chances of landing a job. At the same time, financing a car while unemployed can prove difficult since lenders are reluctant to extend credit to people who may lack resources to repay their debts. However, joblessness need not hinder your quest for a car, if you can find another way to satisfy your lender's underwriting requirements.
If you're unemployed, you may still qualify for a car loan if you have an alternative form of income, find a qualified co-signer or choose a lender that offers special loans to the unemployed. You'll usually still need a good credit score and reasonable debt-to-income ratio.
Qualifying for a Car
While underwriting standards vary among lenders, most car loan companies base decisions on the so-called four C's of credit: collateral, credit, conditions and capacity. With a vehicle loan, your car serves as the collateral for the loan, which means the bank can repossess your vehicle if you default on the debt. You must find a car that's worth at least the amount you intend to borrow. You need to have a reasonably good credit score. The conditions are the terms of your loan, which include making sure you use the money for the purpose intended. Finally, you must prove that you have the capacity to repay the loan. Simply put, you must have enough disposable income to cover the car payment in addition to your other monthly expenses.
Have Alternative Forms of Income
When you submit a loan application, lenders normally ask to see copies of your most recent pay stubs. However, you can qualify for a loan based on other types of income such as pensions, alimony or even investment earnings such as dividends and interest. If you are relying on non-employment sources of income, you may have to provide your lender with copies of your tax returns and other supporting documentation such as dividend income statements and rental property lease agreements. Your lender uses this information to determine the percentage of your income that goes toward monthly debt payments. Lenders refer to the resulting calculation as your debt-to-income ratio. You cannot get a loan if your various income sources leave you with too little cash to cover the proposed loan alongside your existing obligations.
Get a Co-Signer
If you're unemployed, and you don't have another source of income, you may still qualify for a car loan if you can find a willing co-signer. The co-signer must have enough income and good enough credit to meet your lender's underwriting standards. Some lenders allow you to have a non-owning cosigner on a car loan, while others allow only signers whose name appears on the vehicle's title. Both you and the co-signer share the responsibility of repaying the loan. If you fail to repay the loan, then the past-due debt will hurt your credit score and the score of the co-signer.
Seek Alternative Loans
Some lenders use alternative underwriting sources to help unemployed people qualify for loans. A firm may offer you a loan on the basis of your high credit score, even if you lack a conventional income source. In some instances, firms qualify you on the basis of cash you have in savings and retirement accounts. Other lenders offer no-documentation loans, although not having to prove that you have income and not having any income are not the same thing. Interest rates on non-conventional loans are typically higher than on standard car loans because these programs are often financed by investment firms rather than retail banks. The investors assume a high degree of risk that is offset by the potential interest-generated earnings on the loan.
- Federal Trade Commission: Co-Signing a Loan
- Federal Trade Commission: Understanding Vehicle Financing
- Experian: I Don’t Have a Job. How Can I Get a Loan?
- Experian. "7 Things Lenders Look at Besides Your Credit Score." Accessed June 5, 2020.
- Experian. "Debt-to-Income Ratio." Accessed June 5, 2020.
- Experian. "What Is a Rapid Rescore? Is It Something I Should Consider?" Accessed June 5, 2020.
- Experian. "What Is Peer-to-Peer Lending?" Accessed June 5, 2020.
- First Alliance Credit Union. "The Basics for Needing a Cosigner on a Loan." Accessed June 5, 2020.
- Federal Student Aid. "Federal Student Loans: Basics for Students," Pages 2-3. Accessed June 5, 2020.
- GovLoans.gov. "Stafford Loans for Students." Accessed June 5, 2020.
- Wells Fargo. "Cosign a Private Student Loan." Accessed June 5, 2020.