No one ever plans on being unemployed, but getting laid off or terminated can happen when you least expect it. If you’re in this situation, you may need to rely on unemployment benefits to make ends meet while you look for a new job.
But finding a new job–especially when it comes to traveling to interviews–can be challenging without a car. If you need to buy a new car, you may be wondering how your unemployment status will impact your ability to get an auto loan. Can I get a car loan while on unemployment? What can I do to improve my chances of getting approved? Here’s what you need to know:
How to Get a Car Loan While Unemployed
There’s no guarantee that you will get approved for a car loan while on unemployment. However, there are a number of steps you can take to improve your chances of getting approved. Here’s what to do:
- Show Other Sources of Income
- Improve Your Credit
- Find a Co-Signer
- Make a Large Down Payment
- Reduce Your Debt-to-Income Ratio (DTI)
Show Other Sources of Income
During the application process, the auto lender will ask you to submit proof of income. This gives the lender the opportunity to evaluate your income to determine whether you can afford to take out an auto loan and if so, how much you can afford to repay.
If you are unemployed, you can submit proof of these benefits to your lender. However, unemployment benefits are temporary, so you may not get approved for an auto loan if this is your only source of income. If you can show proof of other sources of income, this will improve your chances of getting approved for an auto loan.
Some examples of other sources of income may include:
- Disability benefits
- Retirement benefits
- Rental property income
- Spousal support/alimony
Submit proof of any other source of income, no matter how small, to your lender. This may help you secure approval for an auto loan even if you are currently unemployed.
Improve Your Credit
Your income isn’t the only factor that the lender will take into consideration when determining your eligibility for an auto loan. Your credit can impact your eligibility, too.
During the application process, the lender will perform a credit check to evaluate your creditworthiness. Looking at your credit history can give the lender a better idea of how well you have been able to manage your debts in the past. In other words, the lender will evaluate your credit history to determine how risky it is to lend you money.
The higher your credit score, the better your chances are of getting approved for an auto loan. So if you’re currently unemployed, you may want to work on improving your credit so you have a better chance at securing financing.
Start by checking your credit score to see whether you need to improve it before applying for an auto loan. If there is room for improvement, follow these tips to raise your credit score:
- Look for errors. Carefully review your credit report to identify any errors. If you spot an error, contact the credit bureau right away to get it removed from your report. Removing errors can improve your credit score.
- Don’t open new lines of credit. If you’re planning on applying for an auto loan, try to avoid opening any other new lines of credit. Opening new lines of credit will lower your credit score, which can make it harder to get approved for an auto loan.
- Make on-time payments. Missing or making a late payment will negatively impact your credit score.
- Get added as an authorized user. If your spouse or loved one has an open credit account with perfect payment history, getting added to this account as an authorized user could drastically improve your credit score.
By improving your credit score, you are also improving your chances of getting approved for an auto loan while unemployed.
Find a Co-Signer
If you don’t qualify for an auto loan on your own, you have the option of adding a co-signer to your application. A co-signer is someone who agrees to be responsible for repaying your loan in the event you fail to do so. The person who co-signs your application will not receive any of the money you are borrowing to purchase a car.
Anyone can serve as a co-signer, including parents, spouses, siblings, aunts, uncles, friends, and neighbors.
Adding a co-signer with good credit and a reliable source of income to your application can improve your chances of getting approved for an auto loan.
Make a Large Down Payment
The larger your down payment, the less you will need to borrow to purchase a vehicle. The less you need to borrow, the less of a risk you are to the lender. In other words, making a large down payment can make it easier to get approved for an auto loan even if you are unemployed.
Try to set aside as much money as possible from your unemployment checks. Putting this money toward your down payment may help you secure financing for a vehicle.
Reduce Your Debt-to-Income Ratio (DTI)
Your debt-to-income ratio, or DTI, is another factor that the lender will consider when determining your eligibility for an auto loan. To calculate your DTI, divide your monthly debt payments by your monthly gross income.
For example, if your monthly debt payments are $500 and your monthly gross income is $1,000, this means your DTI is 50%.
Having a DTI that falls below 36% can improve your chances of getting approved for an auto loan while on unemployment. If your DTI is above 36%, try lowering it by paying off smaller debts prior to applying for an auto loan.
How to Apply for a Car Loan
Now you should have all of the information you need to determine whether you are eligible for an auto loan. If you’re ready to finance a new or used car, follow these steps to apply for a car loan from LoanCenter:
- Get pre-qualified. It only takes a few minutes to get pre-qualified for an auto loan. All you need to do is provide some basic information about your residence, income, and employment. Your pre-qualification letter will tell you how much you will be able to borrow and at what interest rate.
- Choose your loan structure. You can customize your loan to ensure the terms fit your unique needs. For example, if you need the lowest monthly payment possible, choose a loan structure with a long term. You can always adjust your selections later on in the process.
- Include optional products. You can choose whether you want to add extra protection to your loan in the form of a GAP waiver, Powertrain Coverage, and/or Advantage Coverage.
- Select your vehicle. Once you’re satisfied with your loan, the next step is finding the right car for you. Browse our inventory so you can find a car that you are pre-qualified to purchase.
- Complete your transaction. Download or print your pre-qualification letter once you find a car you want to purchase. Then, head to the dealership with your letter so you can complete the transaction.
Follow these simple five steps to secure financing and drive home in the car of your dreams.