If you are searching for auto loans for people with no credit, the first thing you need to think about is what the bank looks for. What is the banks idea of a suitable borrower? People with no credit who are looking for auto loans can expect higher interest rates and steeper penalties for late payments. Therefore not only is it a good idea to shop around for the best possible loan is is even better to become familiar with your credit report and the terms it uses to give you your score.
Your FICO score is the ranking the credit bureau gives you. 800 is perfect, 600 is barely cutting it and anything below 500… forget about it, pay your bills on time and check back next year. To arrive at this score the credit bureau uses a complex algorithm to compute several pieces of information. One of these pieces of information is your debt-to-income ratio. This compares how much monthly income you have to how much debt you have. If you make $1000 a month but have to pay $500 to cover all your debts then you have a 50% debt to income ratio (DTI). Lenders like to see a 40% DTI on borrowers whose credit score is 600 or below. People with scores above 600 may be able to get approved with a 50% DTI.
Payment to income (PTI) is the monthly payment you will make on your loan in relation to your monthly income. 15% is the norm. In the case of bad credit auto loans, that is if your credit score is below 600 a lender will not want to see a PTI any higher than 15%. You may be able to negotiate your self into a 20% PTI loan but, do you really want to handle that kind of monthly payment?
Loan to value (LTV) is the relation of the amount of the loan you are applying for to the value of the car you want to get. Most lenders who deal with loans for people with bad credit will not want to give you an auto loan with a LTV higher than 140%. If your score is less than 600 your LTV really needs to be less than 125% which means you will need to put up a hefty down payment or negotiate a really good deal on the car you’re buying.
The down payment is simply how much cash you pay up front. The more of a down payment you make the lower you monthly bill will be. Simple as that. For a bad credit auto loan you will most likely be required to make a down payment of at least $1000.
Some of the other variables the lender will consider is how long you have been employed by your current employer, how many inquires have been made to your credit report, whether or not you have recently gone through a bankruptcy and how long it has been since your last car repossession to name a few.
If you have no credit it will always be more difficult to get an auto loan than if you had great credit. This doesn’t mean it is impossible. Knowing about auto loans for people with no credit and what lenders are looking for is your best defense. Your best offense is getting to know what your credit score actually is and to do whatever you can to repair any mistakes or out-dated entries.