Can You Qualify for a Car Loan?
Unless you’ve been living in a cave for the last year, you’re probably already aware of the current state of the economy and the resulting credit crunch. Unfortunately, if you’re in the market for a car loan, you may find it harder than ever to qualify.
One of the most frustrating effects of the current economic recession is the resulting credit crunch that’s making it harder for everyone to get access to credit. In fact, even those with good credit ratings and high FICO scores may not have access to the same credit opportunities they had just a year ago. Unfortunately, this makes it much more difficult for anyone to qualify for a car loan. If you’re in the market for a new vehicle, consider the following information.
How we got here
In very simplistic terms, the current credit crisis and economic recession are occurring due to failures in the real estate and mortgage industry. A combination of shady lending practices and programs encouraging people to buy their first homes resulted in an influx of sub-prime mortgages – those made to people without good credit. Mortgage lenders sold these loans to Wall Street banks, who then packaged them as securitized assets. Countries around the world purchased these assets, banking on the perceived stability of the American real estate market.
Unfortunately, during this process, many people wound up with mortgages they couldn’t afford. When these loans went into default, the supposedly safe securities investments began to lose value, leading to market weakness around the world. Banks and creditors began struggling to recoup lost assets, and to reduce the amount of credit out in the marketplace. After all, overly committed consumers can’t default on credit card payments and auto loans if they can’t get them in the first place!
So what can you do?
Reduce your revolving debt – One of the biggest factors in determining your FICO score is how much debt you carry, relative to the credit you’ve been offered. A consumer who carries $10,000 in credit card debt is seen as a much bigger risk than one who carries only $2,000. If a potential lender looks at your credit report and sees a high debt load, they’ll be wary of lending to you. Given all your other debt responsibilities, the lender will worry that you won’t be able to make all your payments if something should happen (like a job loss or medical crisis).
If you’re planning to look for a car loan in the next six months or so, do everything possible to pay down any credit card balances you carry. Look at your budget and determine how much extra money you can come up with – for example, if you go out to eat once a week instead of twice, you could come up with an extra $100 each month to help pay down credit cards. Put the extra money towards your card with the highest interest rate until it’s paid off, then move on to the card with the next highest interest. Aim to carry a debt load of no more than 30% of the credit that’s been extended to you - $3,000 out of a $10,000 credit limit, for example.
Lower your expectations
If you’re sitting there, wondering how on earth you’ll be able to come up with any extra money for credit card payments, you need to reconsider whether or not it really is a good time for you to buy a car. Think about it – if you’re struggling to make ends meet as it is, what happens if you’re laid off or fired? That extra car payment that seems necessary will now just be an additional burden to face. Instead, look into alternative commuting options – including carpooling, community car programs, walking, biking or taking the bus.
If you absolutely must have a second car, look for a used one in an affordable price range. A car loan of $5,000 (often the minimum that lenders will give out) will have a monthly payment in the $120-150 range, depending on the interest rate you qualify for. On the other hand, a new car loan for $20,000 will cost $500 or more each month, depending on the interest rate and the length of the loan. Sure, new cars look great in your driveway, but if you can’t realistically afford the monthly payments, you need to adjust your expectations.