If you're getting ready to purchase a new or used car, you’ve likely heard about the importance of your credit score for securing a good auto loan. We've covered what your credit score means, how it impacts your car loan and how to improve it. While your credit score is certainly a consideration for car loan approval, it isn’t the be-all and end-all. There are other variables that go into the equation for auto loan approval and the interest rate you’re offered. If your credit score isn't in the excellent range, be prepared for the following criteria to be examined.

1. Credit History

women loosing at credit
Staying on top of payments shows you're a responsible borrower. 

Your credit score is a dynamic, 3-digit number that factors in a wide range of variables from your credit history. Some characteristics of your credit history will carry more weight and others may even be a surprise to you. For example, cosigning a loan where the primary borrower makes late payments or skips payments altogether will cause your credit to suffer. Think twice before becoming a cosigner for someone else since your well-intentioned deed can come back to haunt you.

If you have a long history of making only minimum payments, this will raise suspicion in the eyes of the lender. Making minimum payments on your credit cards once in a while shouldn’t be troublesome, but if it becomes a habit, the lender will believe you’re likely to default on the loan.

Cash advances on credit cards will also ding your score. To a lender, this signals desperation since you’re borrowing money only to pay someone else. Similarly, if your credit limit was reduced or if your account has been canceled, this is a red flag.  

auto loan application
You can apply for several auto loans within 45 days without hurting your credit.

Too many credit inquiries can impact your credit history and force your score in the wrong direction. If you’re on the cusp of being in the next best credit group, several hard inquiries can take their toll. They can knock you down from the 'excellent' credit category into the 'good' category for example. If you’re taking a few weeks to shop around for a car loan, there is no need to panic. Just keep all your applications contained to a 45-day period and all the inquiries will count as one.

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2. Employment and Income

Mechanic at work
Gainful and steady employment makes you a less risky car loan applicant. 

Before approving your car loan application, lenders look at how long you’ve been employed at your job and your income. In some cases, just your current income will be evaluated. If there is any doubt about your ability to repay the loan, lenders may look at the past 24 months to determine your job stability. Steady employment with consistent income will look favorable compared to sporadic employment where your income fluctuates or disappears completely.

You’ll be more likely to get approved for a car loan with a solid income, but your expenses will also be taken into account in the form of your debt-to-income ratio. Your debt-to-income ratio is calculated by comparing your expenses to your income. This number represents your ability to pay off your loan. Even if your income looks favorable on its own, lenders want to see the complete picture. 

3. Down Payment

Couple calculating car payment

If your credit score isn't where it should be or you've been rejected for a car loan in the past, your ability to make a down payment on the vehicle can swing the pendulum in your favor. A substantial down payment will reduce your total debt on the vehicle. The smaller your loan amount, the less risk the lender is taking on.

Even if you haven't had trouble getting approval for a car loan, a sizable down payment can reduce your interest rate saving you hundreds over the course of the loan. For those with good credit, buying a car without a down payment is possible, but it's not recommended. Ideally, you want to put down between 15-20% of the vehicle's price. Since new vehicles lose up to 25% of their value in just one year, you can quickly become upside down on your loan if you forgo the down payment.

4. The Car's Value 

Cars for sale with price tags

The value of your vehicle will be considered as collateral in the event that you do not repay your loan. If the ratio of your loan amount to your vehicle's value is too high, the loan will be considered more precarious and you'll see a higher interest rate as a result.

The last thing you want after saving up for a new car is to lose the ability to make your monthly payments and force the vehicle to get repossessed. Make sure that you budget properly and select a practical car that you can afford. This will help you get a better rate on your loan, avoid missed payments and reduce the risk of repossession.

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