Having a high amount of debt makes it difficult to get an auto loan, but not impossible. The catch is that any loan you get is likely to have a higher interest rate than it would if you had less debt. By lowering your ratio, you can improve your chances of getting the loan you want.
Why Debt Matters
Debt itself doesn't deter lenders from approving your auto loan applications. After all, credit reporting agencies use debt to determine your credit score and tend to assign you a lower score if you don't have a long credit history. Lenders don't care simply about how much debt you have but how much you have relative to two other important numbers: your income and your credit limit. Your debt-to-income ratio, also known as your DTI, is the percentage of your monthly income you owe to creditors every month. For example, if your monthly income is $4,550 and your minimum required payments total $2,502.50, your ratio is 19 percentage points above the 36 percent lenders prefer. If the outstanding balances on your credit card accounts total $8,250 and your limits total $15,000, your debt-to-credit ratio is five points above the preferred 50 percent.
Comparing Rates
The interest rates lenders offer you on auto loans may be as many as four percentage points higher than those they offer other borrowers, according to CreditReport.com. Yet not every lender is the same, so shop around for the lowest rate you can find. Shop within a 30-day time frame to keep inquiries from lowering your credit score.
Improving Your Ratios
Lower your DTI using the debt snowball plan to eliminate debt. Make a list of your debts, ordering them either by interest rates, highest first, or dollar amount with the lowest balance first. Pay the minimum required on each debt except the one at the top of your list, toward which you pay as much money as you can set aside. Continue this habit until you pay off the first debt on your list, then use the money you would usually use for payments on that debt to pay off the next debt on your list. Reduce your spending and increase your income if possible to expedite the process. Raise your debt-to-credit ratio by keeping credit card accounts open after you pay them off.
Avoiding a Loan
Before you use an auto loan to buy a vehicle, calculate how much the loan will cost you in interest. Multiply the proposed monthly payments by the number of months in the term and subtract the cost of the car. The result is how much of the loan is interest -- in other words, money you could save by forgoing a loan altogether. If you don't need to buy a new vehicle immediately, save money until you can afford an inexpensive used vehicle in working condition. Even if your current vehicle doesn't run, taking public transportation and riding a bike are help you on your way to buying a new one.
0 comments:
Post a Comment