For those on disability benefits, securing a car loan to purchase a reliable vehicle can be a challenge. Normally, if loan payments are not made, the lender can go after the borrower's income to recoup the money owed. Disability and SSI benefits pose a greater risk to lenders because they cannot be garnished, meaning the lender is not allowed to go after these funds if the borrower doesn't pay. This protects the recipient of the benefits, but it becomes burdensome when it comes to buying a car. There are a couple of scenarios where getting a car loan on disability is possible. We'll cover what those are along with the steps you should take to get a vehicle.
Additional Income Sources
Social security disability benefits are intended to cover your medical expenses and some basic necessities. This doesn't leave much for additional expenses like a car, even if one is desperately needed. Some SSDI recipients will work part-time to supplement their benefits. According to ssa.gov and the substantial gainful activity (SGA) guidelines, recipients can earn up to $1,180 per month in 2018 without losing their benefits.
If you have additional income from part-time work along with your benefits, your odds of getting a car loan will improve. This is because the wages earned from the part-time job can be garnished by the lender and provide an incentive for them to lend you the money. The longer the job is held and the higher the monthly income, the better.
Credit Score and Payment History
When applying for a car loan, the lender will want to know the applicant's credit score. Having bad credit while on disability will make it more difficult to get approved than a good credit score. Not all bad credit scores are viewed in the same light, however, and lenders often factor in the reason for the credit rating.
When it comes to auto loans, the lender is looking for proof that the borrower can be trusted to pay back the full loan amount along with the interest. If a bad credit score is the result of an inability to make payments due to a sudden disability as opposed to a long history of habitual late payments, it's more likely that the applicant will get approved.
Steps to Get a Car Loan on Disability
It's always smart to be aware of your credit score and finances when applying for a car loan, but it's absolutely imperative when applying with disability benefits. You'll want to take the following steps to improve your odds of getting a vehicle.
1) Review Your Credit Score
Your credit score will be examined in addition to your income. You should be aware of what your score is by getting your credit report prior to applying for a loan and looking for any potential errors that should be corrected to improve the score.
2) Calculate Your Income
If you work part-time in addition to your disability benefits, you'll have a better shot at getting approved for a car loan. Add up all the additional income sources you have other than your benefits so the lender can factor them in when deciding to approve you. Lenders will look at your debt-to-income ratio to determine how much they are willing to lend you. They take your gross monthly income and compare it to your monthly debt. If this ratio is too high, you're less likely to be approved. Most lenders will look for your monthly debt to not exceed 36% of your income.
3) Find Affordable Vehicles
You may not be able to buy the latest vehicle model with all the bells and whistles, but that doesn't mean you can't find a trusty vehicle to get to your errands and appointments. A well maintained, inexpensive, used car will be your best bet. When looking for used vehicles, make sure you keep an eye out for early warning signs of costly mechanical problems down the road. Squeaking brakes, rust on the exterior, or worn out and rusted engine parts are red flags.
4) Enlist a Cosigner
If you have a family member or close friend that is willing to cosign your car loan, it can greatly improve your ability to get approved. When they sign off on the loan along with you, your cosigner agrees to make payments if you are unable to. If your cosigner has a steady income from a full-time job and good credit, the lender will consider the deal less of a risk.
5) Apply for Auto Financing
Once you complete the steps above, you'll be prepared to apply for your car loan. You can apply for a loan at a bank, credit union, online financing company and directly at the dealership. It's smart to comparison shop for auto financing just like you do with car prices. This will allow you to find a lender who can help you finance the right vehicle at the best rate.