Several factors are used in determining your eligibility for auto financing. They include such items as information contained in your credit report and your financial payment history. The type of vehicle you're purchasing can also contribute to your eligibility for financing. Before agreeing to any auto loan, it's important that you understand the terms of the agreement.
Credit Score
Your credit score is the largest single determining factor in deciding if a dealership or other lender is able to approve you for auto financing. Some dealerships may have policies that allow only certain credit scores to be approved for financing, while other dealerships will work with just about anyone in the right circumstances. If you have poor credit and a dealership is willing to finance an auto loan for you, review the documents carefully and be certain you know the interest rate applied to the loan. A low credit score usually means a high interest rate on an auto loan.
Down Payment
A down payment toward the purchase of a car can greatly affect your chances to get approved for financing. A down payment is applied directly to the car's final price, which means the dealership or other lending institution has to take on less risk in extending a loan. A lender may also consider a larger down payment a significant financial commitment in purchasing a vehicle. This may enable you to get financing for a vehicle when your credit score might otherwise preclude you.
Debt-to-Income Ratio
Your debt-to-income ratio is calculated from the amount of debt you have versus the amount of income you bring in. A dealership or other lender may look at this annually to see how much total debt you're carrying or may look at your monthly revolving accounts. Your monthly debt-to-income ratio shows how you are handling your credit card debt --- if you're making only minimum payments or paying off balances. These figures can determine if a lender considers you a safe risk in extending financing for a car loan.
New Car or Used Car
A new car may have certain manufacturer financing requirements that restrict dealerships from extending financing to only those with good or excellent credit. If your credit is fair or poor, you have a much better chance of securing financing when purchasing a used car as opposed to a new vehicle. This is because the dealership may be able to inquire with more lenders to get you approved for financing with a used car. A new car may have only the manufacturer's financing available.
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