In a NutshellSome lenders may approve car loans for unemployed borrowers who have other sources of income, healthy credit, a co-signer or a sizable down payment. You may even be able to qualify with poor credit at a “buy-here, pay-here” dealer, but watch out for interest rates that can be much higher than those you’ll find at banks or credit unions.
If you need to buy a car during a period of unemployment, it can feel as if you’re stuck in neutral.
Searching for a job can be tough if you don’t have wheels. And it could be equally tough to get approved for an auto loan without proof of income.
So what can you do? Can you get a car loan if you’re unemployed? And even if so, is it wise to take out a car loan when you don’t have a job?
Navigating car ownership through unemployment
The answers to these questions depend on your situation. If you’re not working, you may want to avoid taking on a car loan, which could add more financial stress to your life.
But in some cases you may be able to qualify for a loan even if you’re unemployed. Here are five questions to ask yourself before you apply for an auto loan when you don’t have a job.
1. Do you have other sources of income?
During the application process, most auto loan lenders will ask you to disclose your sources of income. Even if you aren’t working, you may have money coming in each month.
Here are a few examples of other sources of income some people have:
- Social Security
- Investment dividends
- Rental property
If you have monthly income from any of these sources, you’ll want to include this on your application. It might help you qualify for a loan.
2. How good is your credit?
Your credit scores play an important role in getting approved for a loan. Healthy credit scores show lenders that you have a habit of handling your debt obligations carefully.
Strong credit scores — as well as sources of income not tied to employment — could help you find financing for your car purchase while you’re unemployed. If you have healthy credit scores, you may want to try getting preapproval for a car loan before you visit any dealerships. When you get preapproved, you’ll get an idea of what your interest rate and loan terms will be.
You should know that a lender may pull your credit reports as part of the preapproval process, which could generate a hard inquiry into your credit file. Before applying for preapproval, you might want to check whether the lender is running a hard or soft inquiry.
Getting a car loan with bad credit can be more difficult at a bank, credit union or other lender. Some buy-here, pay-here dealerships advertise that they accept people with poor credit or none at all. But buy-here, pay-here dealerships can charge interest rates that are much higher than the rates you’ll find at a typical bank or credit union.
You may be better off trying to get a loan with a traditional bank or lender, even if you have poor credit. Or you may want to wait to apply for a car loan until you’ve improved your scores.
3. Do you have a co-signer?
Even if you have nontraditional sources of income and healthy credit, you may still have a tough time getting approved for a car loan if you don’t have a job. In that case, a co-signer with stable income could help improve your likelihood of being approved.
Before you ask someone to be a co-signer on your car loan, you’ll want to weigh the pros and cons. Your co-signer will be equally responsible for the auto loan. And if you miss payments, each of you could see a hit on your credit scores.
So you’ll want to make sure that you and your co-signer both understand and are comfortable with how co-signing works before moving forward.
4. Do you have other debts?
One of the key factors affecting your ability to qualify for a loan is your debt-to-income ratio. To calculate your DTI, add up all of your monthly debt payments and then divide by your gross monthly income. For example, if you have $500 in monthly debt obligations and $2,000 of monthly income, your DTI is 25%.
$500 (total debt obligations) / $2,000 monthly income = 25%
To keep yourself from feeling financially strapped, it’s a good idea to aim for a DTI below 40%.
And if you have small debts that could be paid off before you apply for an auto loan, you may find that doing so could help your approval chances.
5. Do you have a sizable down payment?
A down payment reduces the total amount you can finance, and a large down payment can save you money on your loan.
For instance, let’s say you qualify for a fixed 6% interest rate on a five-year loan for a $15,000 car purchase. You’d pay a total of $2,400 in interest over the life of the loan. But if you made a 20% down payment ($3,000), you’d only pay $1,920 in interest. That’s a savings of $480.
If you’re planning to buy a car, a larger down payment could definitely save you money. However, big down payments aren’t always the best move. For example, if you plan to lease your car, you’ll generally want to keep your down payment as low as possible.
Some lenders may approve car loans for unemployed borrowers — especially if they have other sources of income. Before you shop, make sure to check your credit scores and look for any issues that may need to be addressed.
And if you’re working to repair your credit or you’re about to start a new job, you may want to hold off on a car loan altogether. Waiting to apply until your job or credit situation has improved could help you land a better interest rate and more affordable monthly payment.