In January 2015, consumer motor vehicle loans totaled about $328 billion, or 37 percent of U.S. consumer credit, according to the Federal Reserve. Car buyers can obtain loans from banks, credit unions and other financial institutions, as well as car dealers and auto manufacturers. But in general, the criteria used to evaluate a borrower’s fitness to finance a car, such as an income and a credit history, are similar for all financial institutions.
To get a car loan, you'll have to complete a loan application. To do so, you’ll need to provide a variety of information including your name, Social Security number, date of birth, occupation, sources of income, gross monthly income and information about your non-secured and secured debt.
Proof of Income
You’ll also be asked for a proof of income to qualify for a car loan. An employer’s pay stubs and bank statements can confirm your income over time, but your lender might call your employer for additional verification. If collateral is required in addition to the vehicle itself, the lender might request information regarding your credit card agreements, mortgage or other loans. The lender will also need the car’s invoice, proof of registration and possibly a certified emissions inspection report.
Proof of Insurance
Your lender will require a proof of insurance for your new car to approve a car loan. You can contact your auto insurance company in advance, or you can call the company from the dealership as your purchase the car.
Proof of Identity
The financial institution will ask for a proof of your identity in the form of a photo identification with your signature. You also may be asked to provide the original of a utility bill with your name and address as it appears on your photo ID, as well as two current bank statements with the identical name and address. The lender might also accept stock certificates, a title to another car or home or a government-issued credential, such as a Medicare card or passport.
Proof of Residence
You’ll need to show a proof of your residence to qualify for a car loan. A utility bill or bank statement in your name with the correct address listed serves this purpose.
To trade in one car to decrease the cost of a new one, you’ll need the car’s title and registration, in addition to documents that confirm the car’s trade-in value. Making these documents available to the lender will speed the loan application and approval processes.
The value of your trade-in will impact your monthly payment. If the dealer offers to pay off your existing car loan regardless of your balance, the company may roll the balance of your previous car loan in your new car loan. Consequently, you will finance the new car and continue to pay for the previous car. For example, your total loan might equal the $20,000 price of a new car plus the $10,000 loan balance for your previous car.
A lender will pull your credit report to evaluate your credit history, but you may get a car loan even if you have a poor credit rating. Car loans are offered from many different financial institutions, some of which will extend credit to people with a low credit score. If you have bad credit – a credit score in the 500 range -- a lender will classify you as a high-risk borrower and your interest rate will be higher than that offered to a borrower with a high credit score.
The amount of your down payment will affect your credit worthiness and vice-versa. Someone willing and able to put money down on the car is considered a better credit risk. In addition, with bad credit or no credit, you’ll probably be required to make a down payment and finance the balance, or need a co-signor.
The dealer will charge you a fee if it obtains financing for your car. This finance charge will be added to your loan, so it will increase your monthly payment. This may be negotiable, so ask if the dealer will waive this payment when you haggle over the price of the car.
Your lender might require you to purchase credit insurance. Before you agree to the deal, find out the cost of the credit insurance and check if you have an existing policy that will cover you. There is no federal requirement for credit insurance, but some states have relevant regulations. Contact your state’s insurance commissioner to determine if such a requirement exists. If indeed the credit insurance is required, the cost should be included in your cost of credit and your APR.
- Federal Reserve: G20 Finance Companies
- Federal Trade Commission: Understanding Vehicle Financing
- Auto Loan Daily: Income Verification - Why You Need to Prove Your Pay to the Auto Loan Lender
- Toyota Certified Used Vehicles: 5 Things You'll Need to Qualify for an Auto Loan
- Bankrate: 5 Car Loan Mistakes that Cost You Money
- New York Times: Dealer Fees for Arranging Car Loans Are Drawing Scrutiny From U.S.
- Consumer Financial Protection Bureau: My Dealer Offered Me Credit Insurance. What Is It?
- 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.
Billie Nordmeyer works as a consultant advising small businesses and Fortune 500 companies on performance improvement initiatives, as well as SAP software selection and implementation. During her career, she has published business and technology-based articles and texts. Nordmeyer holds a Bachelor of Science in accounting, a Master of Arts in international management and a Master of Business Administration in finance.