If you’ve lost your job and you’re collecting unemployment, you may still be able to finance a car, but it will be harder to get approved for a loan. Unemployment isn’t a long-term, stable income source, which lenders want to see. They’ll also look at your credit history and score and income sources when you apply for the loan.
Written by Attorney Eric Hansen.
Updated November 22, 2021
Imagine that you've been looking at purchasing a car when you learn that you’ve lost your job. You were planning on financing the car and you had a large down payment saved up. But now, you’ll have to use that money for household expenses until your unemployment benefits kick in. And you might be wondering if it’s even possible to get auto financing while you’re unemployed. The good news is that it is possible to finance a new or used vehicle while you’re on unemployment. The bad news is that it can be harder to get approved.
This article will discuss how lenders view unemployment benefits and other income sources when it comes to auto financing. We’ll also look at what role your credit history and credit score play and how to increase your chances of getting your loan approved.
How Do Lenders View Unemployment Benefits?
Unemployment benefits are a lifeline for unemployed people until they find another job or other long-term, consistent income source. But they aren’t likely to help you qualify for a car loan. Lenders typically require proof of income that is stable, consistent, and will cover the course of the loan. Lenders don’t view unemployment benefits as stable or long term because they’re not. Unemployment benefits are temporary by design. You’re usually only eligible for unemployment payments for six months of a given year. One recent exception has been during the pandemic as many states extended unemployment benefits eligibility.
The term for most auto loans is longer than six months or a year. That means that auto lenders — financial institutions like banks and credit unions, online lenders, and dealership finance departments — won’t accept unemployment benefits as your sole source of income on your loan application. They may approve the loan if your unemployment benefits are accompanied by other stable, consistent forms of income that will last longer.
Will Lenders Accept Other Income Sources?
Lenders will consider other sources of income that may help you qualify for an auto loan. These include, but aren’t limited to:
Self-employment income, so long as it is steady, sufficient, and dependable.
Pension or retirement income.
Social Security income (whether it’s supplemental Social Security Income or Social Security Disability Income).
Investment dividends and income.
Rental property income.
Child support and alimony or spousal support income.
Income from a trust or a settlement.
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Your Credit Score Matters
Your credit score and credit history make a big difference when you apply for auto financing while you’re employed. They can make an even bigger difference when you’re applying for auto financing when you’re unemployed.
If you have a good credit score...
You might find it easier to get a car loan while unemployed if you have a high credit score. A good credit score looks good on a loan application, but auto lenders will still want to see adequate proof of income so they know you can handle the loan payments comfortably. If you have a lot of debt, your debt-to-income ratio (DTI) may be too high, and that can hurt your chances of qualifying. If your DTI isn’t too high and you have sufficient income, you’ll have a better chance of being approved, even if you’re unemployed. A good credit score will help you get a lower interest rate, which means your monthly payments will be more manageable.
If you have an average or poor credit score...
If you have an average or a poor credit score, it will be more difficult to get auto financing while you’re unemployed. You’ll probably have to work with a subprime auto loan lender, which will end up costing you more money in the end. Subprime lenders typically offer loans at higher interest rates with less favorable loan terms. There may be prepayment penalties, and they may require a larger down payment to offset the risk of lending to you.
The higher interest rates of subprime auto lenders translate to larger monthly car payments for a longer time. This can significantly cut into your unemployment benefits and make it harder for you to pay for other household necessities each month. Subprime auto lenders will also still want to see that you have sufficient income to cover the loan payments.
If you’re unemployed and have average or low credit, you can also consider a buy-here, pay-here dealership. Many buy-here, pay-here car dealers don’t check buyers’ credit scores at all. They will still want to see some proof of income. That said, the interest rates from these car dealerships will be very high even on used vehicles. Sometimes an auto loan from a buy-here, pay-here dealership can hurt your credit score and put you further behind financially. If your car payments are too high, you may have to consider bankruptcy to hit the reset button and get out from underneath a toxic loan.
How To Check Your Credit History
You can look at your credit history by pulling your credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion). It’s a good idea to do this before you look around for an auto loan. While your credit report doesn’t include your credit score, you can usually get your score for free from your bank or credit card company.
Comparing your FICO credit score with the credit ratings published by lenders will help you get an idea of whether you’re likely to be approved for a standard auto loan. If your score is just below the credit rating necessary for a standard auto loan, consider waiting a while before applying for the loan. You can do some work to bump up your credit score before filling out an auto loan application. Also, when you’re ready to finance a car, shop for loans with different lenders and compare the loan terms. Consider getting pre-qualified and/or pre-approved, so you’ll know exactly what loan terms you qualify for.
How To Increase Your Loan Approval Chances
There are many strategies you can use to increase your chances of being approved for an auto loan.
Get a co-signer.
One of the most frequently used strategies is to get a co-signer. This co-signer should be responsible and have good credit. The borrower and the co-signer are equally responsible for the loan. If you make a late payment or miss a payment, it will show up on your creditor report and the cosigner’s, and it will hurt both of your credit scores. Some lenders, most notably subprime lenders, require a co-signer on an auto loan.
Reduce your DTI.
Another strategy is to reduce your debt-to-income ratio (DTI). Your DTI is an important factor that lenders look at during the underwriting process. To calculate your DTI, you up all your monthly debts and then divide them by your gross monthly income. Common debts to include are your rent/mortgage payment, minimum loan payments, minimum monthly credit card payments, any spousal or child support payments, and other lines of credit.
Lenders like to see borrowers have a DTI of 25% to 36%. If you have credit card debt or a small personal loan that is increasing your DTI, you may want to first pay them off or down. Once you have a lower DTI, your odds of being approved for an auto loan will increase.
Increase your down payment.
If you’re able to pay a larger down payment, you should do so whether you are employed or unemployed. Making a larger down payment will reduce the amount you need to borrow to finance the vehicle. This decreases your monthly payment. If you received a severance payment from your previous employer or you expect a large tax refund, you may want to consider using that money for a larger down payment to reduce your loan amount.
All this said, if you’re unemployed, it isn’t usually the best time to take on an auto loan. There are typically other, more pressing financial issues, and taking on more debt can create more issues. Unless it’s absolutely necessary to get a car with auto financing while you’re unemployed, it’s wiser to wait. Once you get a new job or another steady income source (like Social Security Disability Income or a pension), then you can think about looking for auto financing. While you’re waiting, it’s a great idea to do some credit repair to raise your credit score.
Yes, unemployed people need cars too. It’s possible to get auto financing for a new vehicle or a used vehicle while you’re receiving unemployment benefits. But just because it’s possible, doesn’t mean it’s a good idea or that it’s easy. Having a good credit score and a low debt-to-income ratio will help. But you’ll still need to show that you have some source of stable, long-term income for most conventional auto loans. Getting someone to co-sign the loan, making a larger down payment, and decreasing your DTI are all also helpful strategies to increase your odds of getting approved.