Numerous auto financing problems exist, although many can be overcome. Depending on your credit history, money down or even the vehicle you choose, you may find difficulties with a loan approval. Learn about different auto financing problems and what you can do to solve them.
Vehicle Value
Banks lend according to loan-to-value ratios, which is the amount you ask to borrow compared to the vehicle's bank-determined retail value. Even with excellent credit, you cannot borrow $20,000 for a vehicle worth $10,000. Loan-to-value ratios become an issue when the car you're trying to buy costs more than it should. Banks also make determinations about the loan amount compared with the vehicle value according to credit. Good to excellent credit consumers may be able to borrow up to 120 percent of a vehicle's value, while poor credit consumers can see as low as a 60 percent lending value. A good cosigner or money down will help.
Debt-to-Income Ratio
Even with excellent credit, you can still face vehicle financing problems because of debt-to-income ratios. While the bank does consider your credit score, it also views your credit report to determine the amount of debt you pay out each month, including loan balances and payments, mortgage payments, credit cards and whether or not you are the primary or secondary borrower (if you're a cosigner or someone cosigned for you). Your income is looked at, as well. With this issue, a cosigner can help you to establish a loan because of additional income, or you can find a lower priced car.
Credit History
Other issues may include lack of credit history, poor job history or first job, unstable home address (you move often) or self-employment. Some banks offer a "first time buyer" loan, which offers a higher interest rate than traditional loans, but can help to establish credit. Borrowers without credit history may also face a lesser loan-to-value ratio, meaning money down is necessary to obtain a loan. Otherwise, a cosigner is strongly recommended for those who have not yet established themselves. For business owners, prepare to produce years of tax information to prove your income.
Warning
No matter which vehicle financing problems you face, consider your budget before making a desperate or pressured decision. A cosigner is a safe bet for problem borrowers, but finding one can prove difficult, as the cosigner must have good to excellent credit, an income and agree to become liable for your vehicle loan should you default. It is not advisable to borrow money for a required down payment or to accept a higher interest rate and car payment than you can afford, even if you cannot obtain approval otherwise.
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