What’s the Maximum Car Loan I Can Get with Bad Credit?

There are many questions surrounding the process of getting approved for an auto loan with bad credit or challenged credit history. Although some lenders may approve a larger loan so you can finance your dream car, this may not actually be a good move for you to improve your credit score in the long run.

Larger loans for borrowers with low credit scores usually also come with baggage: longer loan terms. This means that you’ll be paying a higher interest rate, and it will take you much longer to pay off a vehicle while its value depreciates. So, what is the maximum car loan you can get with bad credit? And is it a good idea to max out your loan options? 

Loan Amounts vs. Credit Scores

To start, make sure you’re working with a financing professional who has experience in finding solutions for borrowers with low credit scores. You might be turned away from working directly with a bank or other financial institution. Each lender has their own minimum qualifications they use to determine whether a borrower would be a good fit for them. If you’re turned away, that’s okay. Auto financing experts like our G&E Motors financing team go beyond initial numbers and figures, while knowing that an auto loan could be your chance to improve your credit score. So, how does bad credit affect loan amounts?

There isn’t a concrete formula that dictates how much those with specific credit scores can borrow for an auto loan. For example, no one can say that if your credit score is 650, you’ll automatically qualify for a $15,000 loan. Determining loan amounts goes more into calculating what you as a borrower can realistically pay back in a certain number of years; so, looking at your monthly income is a key factor. If your income can’t support a $40,000 loan, you will be denied for that amount, especially with low credit. But if you can budget in payments for a $20,000 loan, you have a much better chance of being approved, but at a higher interest rate. Interest rates vary based on whether you are a risky borrower to lenders, or if they can be confident that you will make timely payments and not default on your loan.

In addition to thinking about the loan itself, keep in mind that a higher down payment might help you get a loan approval, or give you more options for being approved for a higher priced vehicle. If you have a higher income but with bad credit, be prepared to make this work in your favor by being ready to offer a higher down payment for the vehicle you have your eye on.

If you are approved for financing with a higher interest rate than you expected, don’t worry. As you make timely payments throughout the duration of your loan while continuing to pay your other debts, your credit score will increase. At that point, you have the option to refinance your loan. (Read our previous blog post to learn more about when you should consider refinancing). However, your ability to be approved for larger loans doesn’t mean that they are necessarily in your best interest. Being able to make payments and stay in good standing with the lender is the most important thing, especially if you already have less than ideal credit.

Going Beyond Credit Scores: What Other Factors Are Considered?

If you have subprime credit, your loan eligibility is calculated by your Debt to Income (DTI) ratio. You simply plug in your monthly income before taxes and calculate your monthly debt payments. Debt payments include recurring payments like your rent or mortgage, credit card bills, student loans, and health insurance. Debt payments do not include utility bills or other living expenses.

Generally, a DTI ratio of 36 percent or less is considered to be in good standing. This means that your debt payments add up to be just a little bit more than a third of your gross income. In February 2017, the average American who was in the process of applying for a mortgage loan had a DTI of between 23 and 35 percent. However, lenders understand this may not be the case for those seeking an auto loan. The restrictions are a little looser, but if you have a low credit score, DTI will play a larger role in determining whether or not you will qualify for financing.

Use a DTI calculator to easily calculate your percentage. This can even save you a couple of steps while in the process of obtaining financing on your next used car. In addition to DTI, lenders will ask for proof of income, employment duration (six months or more is best), proof of residency, and documentation for a working landline or cell phone in your name.

Why It’s Better to Start Smaller

In terms of the car you want, you’re already considering many factors. Mileage, fuel efficiency, vehicle model, and price all weigh in to choosing the vehicle that’s the perfect fit for you. Whether you need the vehicle to assist with your business or for personal use also factors in to how much you may need to invest. However, if you’re preparing to take out a loan with bad credit, it’s best to not go for one of the most expensive models on the lot. Buying used will already save you money and give you a better variety of options to choose from but going above and beyond to buy smart will help you right from the start.

Aim for a loan with a shorter loan term (three years is optimal) and for which the monthly payment will add no more than 10 percent to your DTI. So, if your current monthly income is $3,000 and your DTI is 35 percent, your ideal loan payment is $300 or less. Use an auto loan calculator to figure out how much of your monthly budget you can reasonably allocate to your loan payment, and what your price range is for the car itself.

Once you have your price range figured out, look through our online inventory or stop by our dealership to see all the models we have in stock. And our professional financing specialists are always available to help you with financing approval that will work within your budget. Happy shopping!