Last Update: June 2016
You want a new car. But you’re worried about getting approved for car financing or car leasing. Sound like you?
As a car sales person, I’ve come to realize that the credit approval process confuses buyers, while also scaring the hell out many. I was one of those car buyers myself…
Even after I started selling cars in 2013, the thought of shedding light on my own credit report terrified me. I work a large dealership with traditional lenders. I wanted to lease a Chevy Cruze, but I thought there was no way I could get approved for a lease with my mud-like name, especially after my divorce. I thought about going to one of those “We Approve Everyone” high-interest, predatory kind of car lots. But I held tightly to the steering wheel of my 1998 Honda Accord. Eventually, after a few months, I got more comfortable with the idea of trying to get a approved for a new car. And guess what? I did! I leased my 2014 Chevrolet Cruze in April of 2014.
I remember going to my sales manager, sliding my credit application across the desk, as if it were a snot rag I had guiltily asked him to take in his hand and throw away for me. He looked it over and said, “Ok, I think we can do something. Go pick out your car.”
I couldn’t believe it. I was stoked! My first brand-spanking-new car at 42 years old!
I can now say, driving a new ride improves the quality of one’s life — my confidence and deserve-level went way up. Peace of mind reduces stress. I never have to worry about my car and if it’s going to make it to my next destination. At the same time, making an on-time, regular payment on a car greatly improves one’s credit score. In fact, later in November of that same year, I co-signed for my son to lease a car as well. Me – a cosigner!
In my experience selling cars, I find there are two types of credit challenged car buyers: The first are those who think there is little chance of getting approved because of their poor credit or no credit score. And when they find out that they got an approval, they are grateful. Then there are the oblivious ones — those who have zero concept of how bad their credit situation really is. They are often surprised they are offered fewer choices or even turned down. Not only are they shocked, they are outright offended they might be asked to lower their expectations about the type of car they can qualify for.
Anyway, no matter what kind of credit-challenged buyer you might be, here are a few tips…
When it comes to getting approved for an auto loan or lease, credit is much more than just a score. If you’re a 740+, you’re probably going to be invited to purchase anything you want. If you’re less than a 700, you might have a few hoops to jump through before finding out if you’re approved or not. My advice is: just go with it. I’ve seen a “0” FICO score get approved for a car purchase and I’ve seen a 625 get turned down. It just depends.
Now, in all fairness, I work at a dealership where the sales and finance managers are masters at what they do. And I get the feeling we’re a little special in that regard. But no matter what dealership you visit, getting an approval is simply a process you must go through to find out what your options are. Trust me, your dealer wants to get the car deal even more than you want to get into a new car. So let them do their job.
I often get questions about interest rates. My answer is: don’t worry about it. Your dealer is going to work to get you the best possible interest rate. However, DO NOT — if you can at all help it — go to a J.D. Byrider or a Car City or some other “Buy Here, Pay Here” kind of place. The interest is something like 18-24 percent and even higher. Of course, those kinds of dealership serve a purpose when there is no other way. But unless you’ve been turned down at two or more traditional dealers, don’t go to those shady kind of car lots.
Like I said earlier — instead of a number — a person’s credit score is made up of several financial aspects. Getting approved for a car loan or lease involves a lot of moving pieces: income, stability, open accounts, equity, debt, down payment and even current incentives or discounts you qualify for.
Here are a few of the questions you will be asked when submitting a credit application for a vehicle:
- Income – What is your gross monthly income? Whether your income flows from a wage-earning job, salary, social security, child support, it all counts — but make sure you can prove it. If you’re credit challenged, you should be able to show at least $2K a month in gross income. If your income is that low and your credit score starts with something less than a “7,”, you can expect — at best — to get approved for a low payment on an economy car.
- Stability – How long have you worked at your job? You will also be asked how long you’ve lived at your current address. If it’s less than a year, in either case, be prepared to provide details about your previous job and address.
- Accounts – Are you current on your bills? When a lender reviews your credit report, they are looking for answers to the following questions: Have you paid a current or previous car loan regularly and on time? How many times have you been late? How recently did you pay off your last car loan? Do you have an repossessions — even voluntary? How long ago? Are there charge offs or judgements on your credit report? If you don’t have any accounts on your credit report — because you’ve never had credit or it’s been years since you’ve had any credit, then you’re credit score is likely a zero. That doesn’t mean you can’t get approved for a loan, but it presents a challenge to getting approved. Money down is usually the answer, but let your car dealer worry about this before you start worrying about it.
- Equity (or negative equity) – Do you have a trade? How much do you owe on the vehicle you’re trading in? Who is your lender? What is your account number for your current car loan? How much is your payment? How many miles a year do you drive? What’s the 10-day payoff? What is your per diem? (Your sales person will be able to help get this information, usually during normal business hours.)
- Debt-to-income Ratio – How much debt do you have? I’ve not seen this be a particularly huge problem, but depending on credit score and income, you might have too many auto loans in your name to get approved on another one, unless you’re trading one in or paying one off. Maybe you cosigned for someone and they pay the bill. Either way, don’t worry about this until you go through the whole process. Remember, your dealer is your advocate. The more information you provide about your finances, the better. When a deal is submitted, the bank will let the dealer know what is needed in order to approve a the deal. And if your dealer is armed with information, they can often have some bank requirements waived.
- Discounts & Incentives – I work at a GM dealership. So my first question to everyone is: Do you, for any reason, get the GM Employee Discount through a family member? Or, do you get the GM Supplier Discount? I’ve got a list of current GM discount questions I ask. That way, if you do qualify for any current discounts or incentives, it will help lower your payment and, perhaps, better allow for an approval.
- Down Payment – What is the minimum amount of money you plan to put down? In most cases, you can sign and drive at a dealership. In other words, you can get approved for a car loan or lease without any money down — even if your credit isn’t great. I’ve seen it hundreds of times. In fact, I had a 580 credit score when I leased my Cruze for $0 down. However, there are many cases when the lender requires a down payment in order to get approved. This will happen if:
- a) you’re a first-time buyer; you have no credit score or limited credit history
- b) your credit history is chaotic enough that the bank asks to see a good-faith chunk of change down, showing your commitment to the deal to lower the bank’s risk; or…
- c) the car you have selected is more car than the lender thinks you can afford based on your over-all credit situation. For example, I worked with a single mother in her early 20s who made $12 an hour. She wanted a car that would be safe for the upcoming winter. Her credit score was 604. She wanted to lease a new 2015 Impala, which is — at minimum — a $30K car. The leasing company said they would approve her at a $250 a month lease payment, which meant she’d have to take a Chevy Cruze. I was excited for her — she could get into a new car that would be reliable and safe for her and her toddler. And she’d get an opportunity to build more credit history so she could have more choices in a couple of years. But she was deeply offended by this notion and wasn’t having it, so she drove away in her old car. She didn’t want to accept that she’d have to walk before she could run.
To help make the credit approval experience more tolerable, the following are what we call “Stips” — short for stipulations — which a bank might require for your car loan or lease approval. You might feel more prepared and save you and your dealer a lot of time if you have these things with you –
Proof of income (POI): Most recent pay stub with year to date earnings. In most cases, this is all you will need. However, extenuating circumstances might also require the following.
- If the Year To Date (YTD) earnings don’t show the income you are claiming, you need to have a documented reason for that, i.e. pay raise documentation, new annual contract, sick leave, etc.
- Are you self employed or 1099 contract worker? Bring two years worth of tax returns with Schedule C.
- 30-day bank statement
- Last year’s W-2 (I recently saw this stip required by a bank who approved someone with no credit score).
Proof of Residency (POR): Driver’s license with your current address on it. In most cases, this is all you will need. However, if you don’t have the correct address on your license, you should also be prepared to provide a utility bill (i.e. cell phone bill, cable bill, electric bill) in your name and listed at your current address.
References: Name, number and address of three personal references who are over 18 and don’t live at your address.
Billing Statements: Proof that current Mortgage and Auto loans are up to date without a past due balance. (Needed in case any of these loans are showing as late on your credit report.)
Down Payment: In some cases, you will be asked to have the first payment down, or $500 or $1000. In extreme cases, in which you have more than $5,000 in negative equity on your trade, you will be asked to have more down. (If you don’t have any money down, and are asked to put money down, think about ways you can get some, i.e. credit card, borrow, sell an item.)
Trade Title: If you are trading in a vehicle, you will want to have your car title with you. If you can’t find your title, get an Instant Title. Or, in some cases, you will be able to pay a $50 Lost Title Fee and sign Lost Title paperwork, so the dealer can apply for a new title for the trade they are taking in. However, some dealers don’t allow this, or they don’t allow it when they are running a Cash for Junker event. By providing your own title, you’ll save some money and stress. Lastly, if you are still making payments on the car you want to trade, know who your lender is and have your 10-day pay off and per diem. Usually, your sales consultant can help you with this, but — obviously — it’s good for you to have this information.
If you have more questions, please feel free to contact me, Sylvia Dana, at Berger Chevrolet in Grand Rapids, Mich.