Thanks to COVID-19, a record 30 million Americans are receiving unemployment benefits due to a job loss. For this group, the uncertainty of the future adds to the stresses of day-to-day errands and family obligations that can’t be put on pause. A reliable vehicle provides the stability needed to handle essential tasks. For those who are job hunting, it is also the key to finding new opportunities and having dependable transportation to and from work. In an ideal scenario, it's best to hold off on a car purchase until you have a steady income, but reality can look vastly different. 

woman driving to work during covid

If you need to purchase a car while collecting unemployment, you may wonder “can I put my unemployment check towards a down payment?" The short answer is, yes, but there are additional factors to consider when it comes to your auto loan. We’ll cover what's involved in a car down payment and the ins and outs of financing a car when collecting unemployment benefits.

Is a Down Payment Required for My Car Purchase?

car down payment

A down payment is not always a requirement when financing a car, but it is recommended for shoppers with compromised credit or those without a traditional income source. All car shoppers are advised to put down at least 20% on a new car and 10% on used, but those with good credit, a steady income, and a low debt-to-income ratio give lenders the confidence to eliminate the down payment requirement.

While collecting unemployment benefits, a substantial down payment helps you get approved for a car loan without a traditional income source. It also reduced your monthly payment and your interest rates to provide much-needed savings on the total cost of the auto loan. According to CapitalOne, your payment will drop $20 a month for every $1,000 you put down, based on a 5% APR. In addition to using your unemployment benefits which we address below, you can apply the trade-in value of your current vehicle towards the down payment of the car you're buying.

Unemployment Benefits as a Down Payment

unemployment benefits

If you're just starting to receive unemployment benefits, it's important to understand how they can be used and your options for the method of receiving payment. According to the Consumer Financial Protection Bureau, unemployment benefits can be received as a direct deposit, paper check, or a prepaid card.

Should you need to change the method of receiving the benefits, you can do this at any time. Some methods vary by state and you can find guidelines for your location with the U.S. Labor Department’s Unemployment Benefits Finder. No matter what form your benefits come in, the money is yours to spend as you wish, just like a paycheck from an employer. This means you're free to use it as a down payment for your vehicle purchase and to cover your monthly car payments.

For those who have been receiving unemployment since the onset of the pandemic, the good news is that the COVID-19 relief bill meant Americans got more in federal benefits thanks to a supplemental $600/week in addition to state unemployment. Saving up the extra funds for a couple of months helps cover the minimum recommended down payment on a vehicle purchase.

Car Loan Approval While Unemployed

man with car keys
Traditional income isn't the only way to get the auto financing you need.

The process of using your unemployment benefits as a car down payment should be smooth sailing, but applying for a car loan while unemployed may hit you with some headwinds. Typically, lenders look for a traditional source of income from a steady job, and unemployment benefits are not viewed as income because they are temporary. A car loan can span 5 or more years while unemployment benefits last an average of 6 months. According to Credit Karma, in the event a car shopper is unemployed, other income sources that should be included on an application are: social security, pensions, alimony, investments, and rental properties. 

In addition to making a down payment and including alternative income sources on the car loan application, having good credit can help car shoppers get approved for a car loan while unemployed. Before applying for auto financing, check your credit score and correct any errors which might be dragging down your rating. Enlisting a cosigner with a strong credit score is the best option for those who are unemployed and have compromised credit.

If you're in doubt whether you will qualify for an auto loan while unemployed, your best bet is to get pre-approved by several lenders. Auto financing options for shoppers with bad credit include credit unions, local banks, and online lenders. By getting pre-approved, you'll be able to compare interest rates and loan terms to choose the loan offer that suits you best.

Get Pre-Approved for a Car Loan Today