Banks look at various pieces of personal, credit and vehicle information to determine whether to extend a loan. Then, according to the information it gathers, a bank sets a loan interest rate and term. You may also find that you are required to provide a down payment or may face term restrictions if your application is approved.
To apply for a loan, you must provide your potential lender with your Social Security or Tax Identification number, which allows the lender to view your past credit history. Your credit report lists any current accounts that you’ve had in the past, such as car loans, mortgages, personal loans or other lines of credit. The lender views your payment history on all reported accounts. Your credit score may be affected by past due accounts, charge offs, judgments or lack of credit, which may result in the decline of your application. A positive payment history and length of time on open accounts are favorable.
Employment and Address History
Aside from your account history, you must have verifiable income to obtain an auto loan. Banks prefer that borrowers have a stable income, so expect to provide at least two years worth of employment information to your bank, including names of employers, positions and income. Banks also like to see a stable address history, so you'll have to also provide at least two years of address information. Lenders will take a new job or address into consideration if time was established with a past employer or at a previous address.
You must have enough income to pay for your auto loan, which your bank will verify. Your lender will determine whether or not you can afford an auto loan by assessing the amount of debts you pay out each month in comparison to how much money you make, known as your debt-to-income ratio. Someone who makes $20,000 with little debt responsibility might obtain a loan approval while someone who makes $100,000 with maximized debt might not. Expect to prove your income by providing your lender with your most recent pay stub or copies of tax returns if you're self employed. Other sources of income are also considered; your bank will let you know which documents are acceptable for proof of income.
Lenders base the amount of an approved auto loan on a vehicle's market value. Using the car's year, make, model and features, the lender determines a vehicle’s worth. Based on your credit, you may borrow up to 120 percent of the vehicle's value or as low as 60 percent with poor credit. For this reason, you may be able to roll taxes into your loan or find you have to provide a sizable down payment. Many banks have vehicle year and mileage restrictions for auto loans. For example, your lender may not offer loans on vehicles more than five years old or with more than 100,000 miles on the odometer. Restrictions differ by bank.
- USA.gov. "Credit Reports and Scores." Accessed March 19, 2020.
- Consumer Financial Protection Bureau. "What Is a Credit Score?" Accessed March 19, 2020.
- Fannie Mae. "B3-6-02: Debt-to-Income Ratios (08/07/2019)." Accessed March 19, 2020.
- Consumer Financial Protection Bureau. "Create a Loan Application Packet." Accessed March 19, 2020.
- Office of the Comptroller. "Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers." Accessed March 19, 2020.
- Consumer Financial Protection Bureau. "Does a Credit Inquiry Have a Different Impact on My Score if I’m Approved or Denied?" Accessed March 19, 2020.
- Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed March 19, 2020.
- Federal Trade Commission. "Credit Scores." Accessed March 19, 2020.
- Experian. "What to Do If Your Loan Is Denied." Accessed March 19, 2020.
Shanan Miller covers automotive and insurance topics for various websites, blogs and dealerships. She has extensive automotive experience, including auction, insurance, finance, service and management positions. Miller has worked for dealer sales events around the United States and now stays local as a sales and leasing consultant for a dealership.