The paycheck of your income is spent over a number of things ranging from household items to your monthly payments and dues. When you purchase a car, the gross monthly income becomes a key factor in order to ascertain your creditworthiness. Income provides a clear gateway to the lender to evaluate your plan of repaying the auto loan. Asking the right questions can help you gain clarity on how income can play a huge role in buying a car. A question we frequently struggle with is: Is income influential or irrelevant to the decision of purchasing a car?
Buying a Car: Is your Income important?
So, which income-related questions should you ask yourself as you ascertain the purchase of your car?
Q1) Can I leverage my strong debt-to-income ratio in order to obtain a new car?
The common misconception surrounding cars is that the difference between the incomes of two people determines your auto loan approval. In other words, it is to say that a person with a higher income would be more likely to purchase a new car or get faster auto loan approval. However, a lender ascertains your creditworthiness primarily through your debt-to-income ratio and then through the value of your income. A debt-to-income ratio compares your monthly debts against your income before taxes. Lenders consider a debt-to-income ratio of 36% or lower favorable. Therefore, a strong debt-to-income ratio will put you in a good position to purchase a new car with a long life and low maintenance costs.
Q2) Will I be able to manage the interest rates?
The most effective way to plan the purchase of your car is by assessing the total amount of the auto loan including the interest rate. A winning move to earn you brownie points while negotiating a lower interest rate is to pay a large down payment. The more money you put down, the larger will be your savings in terms of interest rates over the loan term. As you pay a portion of your income in the form of a down payment, it improves your creditworthiness and provides less risk to the lender.
Q3) Can I improve my approval chances with a high credit score?
Along with a good income, a good credit score equally increases your chances to get approval for the auto loan. A good credit score positively displays how well you have managed your finances and credit. A FICO score of 700 or above is ideal for quick approval. You could start by improving your credit score before you set out to purchase your car. A few methods to build your credit score include paying off any pending debts, keeping a low balance on credit cards and becoming a cosigner. As a good credit score can overshadow the situation of a low income, it becomes imperative to get your credit score to an ideal level before purchasing your next car.
Purchasing a car is no longer a luxury but an absolute necessity. So, naturally, while purchasing a car we want to make sure we get the best deal. In order to purchase your dream car, you need to ask yourself the right income-related questions and evaluate your financial standing. Moreover, with the right preparation about debt-to-income ratio and credit score, you can get one step closer to the car of your dreams.