If your current vehicle isn’t reliable and you’re constantly spending money on repairs, you might consider a new purchase. Buying a new car is a wonderful feeling and a major sense of accomplishment. You might visit the nearest dealership, such as Pompano Nissan and test drive the newest models. But before completing an application for credit, you need to understand factors that can stand in your way of an approval.
Auto lenders take several things into consideration, such as your employment record, your income and your current credit. If you’re steadily employed and can easily afford the monthly payment on your new vehicle, you might apply for a loan with confidence. Unfortunately, it takes more than cash flow to qualify for a vehicle loan.
Credit plays a big part in the approval process, and it’s smart for every applicant to check his or her credit score and credit report before applying. You don’t need perfect credit to qualify for a loan. In fact, many dealerships offer sub prime auto loans. Yes, these loans feature a higher interest rate, but they can help you qualify for a new set of wheels.
If your credit is fair or good, you might assume that you’re guaranteed a loan approval. But if you’re struggling with credit card debt, this can be the kiss of death. Even if you pay your creditors on time each month, struggling with a large balances increase your debt to income ratio. How does this affect your ability to finance a car?
When applying for a vehicle loan, the auto lender will review your credit history and assess your existing debt. The lender takes the sum total of your minimum debt payments (including the new auto loan payment) and divides this figure by your monthly income to calculate your debt to income ratio. For example, if your debt payments are $1,400 a month and you earn $3,000, your DTI is 46%.
As a rule, lenders prefer applicants with ratios under 40%. Before applying for an auto loan, calculate your debt to income ratio. The lower your ratio the better, as this not only results in an easy approval, but a lower interest rate. If your ratio is higher than 40%, take steps to reduce your credit card debt.
Add extra money to every monthly payment to reduce balances faster. Let’s say you have a $25 minimum payment on one credit card. Increase this payment to $50 or more each month. As you make higher payments, stop using your credit cards. It’s pointless to pay down your balances and accumulate additional debt.
If the problem is lack of self-control, cut your credit cards in half or destroy them in a card shredder. Requesting a lower interest rate or transferring your balances to a low-rate credit card also helps. This reduces how much you pay in interest, thus helping to lower your balances faster.
Stick with your debt pay off plan, avoid new credit card charges and you’re a step closer to your new vehicle. This approach gives your credit score a jump and increases your purchasing power.