Are you qualified for a car loan?

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You have made the decision. You are ready to get a new car. You can already smell that new car smell. The only problem is you don’t have enough money to pay for the car in cash. You need a car loan.

So, what do you need to be qualified for an auto loan?

There are lots of factors that go into it:

  • The type of vehicle you are looking to purchase.
  • Whether you have a trade-in.
  • The length of your loan term.

We talked to Michael Guilbault of Detroit Trading Co. about what you need to know before shopping for a car loan.

Debt-to-income ratio

The debt-to-income ratio, or DTI, is the key to determining the terms of your auto loan for you and the lender. This ratio is calculated by adding all of your existing monthly debt and dividing it by your monthly income.

Your debt takes into account many things — credit card balances, mortgages, student loans and other debts. A good rule of thumb is to keep your DTI below 30%, especially since you are adding another monthly payment to your debt load with a car loan.

You can use our calculator to help figure this out.

Credit history

It is important to look at your credit history before deciding on a vehicle. Having past negatives can impact your credit score, resulting in a higher interest rate on the loan.

“It can be a deal breaker to have a negative auto loan, but there are some lenders who will still offer financing at a higher rate or if you have a trade-in. It definitely helps to shop around,” Guilbault says.

If you’re thinking of shopping for a car, first check your credit score for free at myBankrate.

Do you have a thin credit file?

If this is your first car or you haven’t had a car loan in a while, you may not have much on your credit report.

This is not a deal breaker, but you may want to look into having a co-signer to keep your interest rates low. If you haven’t started building credit, consider establishing credit for at least 6 months before applying for an auto loan.

Guilbault suggests looking for first-time, auto-buyer programs. Many lenders offer these programs, and they can be a great way to get into that new car.

Guilbault says it’s important to browse for a new car with an open mind. Dealers and lenders are willing to try different options and deals, but if you are set on a specific car or a certain loan type, that can make the process more difficult.

Shop with an open mind and your research in hand, and you’ll put yourself in the driver’s seat of your new car loan.