Need advice on auto loan for first time buyer

[Anonymous]

Hey guys, I don't normally just join a site without first checking it out first, but off quick glance this seems like a very knowledgable site - so here goes!

Long story short - I applied for an auto loan through my credit union and got denied. Luckily I was doing this for research on the car I want to get, so I have a few months, BUT the car is being order and manufactured. One dealership doesn't make any mention of needing a pre-approved loan, while another one says they need one.

Reason why I got denied was because of "limited credit history". Now I'm not sure why that would be the reason, as I've had my credit card for over 5 years. I could completely see the DTI ratio, as that has been high because I bought a computer my senior year of college and have been slowly paying it back / using the card in tight situations.

Both want $500 deposit to order the car, which is no problem. My only real problem is - securing a loan by the time it comes in. I know my score will be higher as my debt on my [one] credit card, will be almost non existant by the time I reapply. I'm shooting to reapply by Feb, so then when the car comes in by March, I'll be ready to go, loan in hand.

Any and all help is greatly appreciated. I gave some stats below, so hopefully that's all you need, but I can provide more info if needed. Side note - this is my dream car, so I'd really rather not "just get another car" as I should be able to pay this off in a decent amount of time.

Some quick and dirty facts:

Credit score - 672 (EQ pulled). Only "negatives" would be opening my account with my credit union, pulling my own credit through EQ, and doing this loan app.

DTI: 85% but this WILL be paid off no later than mid Jan

Credit union: Pen Fed

Moved and started a new job 2 months ago, but make 5k before taxes

Rent: Living with a friend, so rent is low.

Loan amount requested: 40,000 - I shot really high on this with worse cause scenario being paying more for the car than quoted, large TTL fees, and putting no downpayment.

Term: 60 months - again worse case scenario as I predict it will be paid off in 48.

[cdtotten]

Ok, here are the issues:

1. Credit score - it is actually not that low, but if you all you have is a credit card and thats it... most lenders are going to want a co-signer. You would have a "thin credit file", which offers little value to the lender. As a side note, pulling your own credit does NOT affect your credit score at all. Your score is low because you have a thin file... you do have a limited credit history, and because utilization that high will kill any score. Get it under 9%, preferably 1%.

2. Is the job in the same field as your previous job, and or in the field of your educational study? Most lenders will want to see a year in the same field/same job.

3. How much is your rent + month. Contrary to popular belief, living with a friend is not a good thing when it comes to being approved for a loan. If your friend kicked you out tomorrow and you had to start paying real rent, then your DTI could skyrocket leaving you in a bad place.

DTI actually shouldn't be an issue for the loan. A $40,000 loan is probably going to run in you in the $700-800/month category which is EXTREMELY high and well beyond what you should buy, but from a DTI perspective should be ok. I think you may eventually get approved once your util is under control, but I would expect a co-signer and a rate near 8-10%, which on a car that expensive is not worth. You are going to be so upside down in the car after 2 years that your head will become dizzy.

[Anonymous]

Gotcha, thanks for the quick reply. Here are my things though:

1) When you say utilization, do you mean DTI? Also, I COULD get a co-signer, but I can only imagine the burden that may be.

2) The career change is in the same field persay, but more specific to my career goals (Computer help desk to computer analyst)

3) Rent is $600 (about half of what it would be if I lived on my own), but I signed an official contract with the realtor. Not sure if that makes a difference or not, but I don't see myself getting thrown out anytime soon (anything can happen though right?)

If you're saying that $800 is too high, what would be a better number to aim for? (In case there is no way to get that car after everything)

[cdtotten]

1. No, DTI and utilization are completely different.

Utilization = amount of credit card debt  / total credit card limits. So $5,000 in cc debt on cards with $10,000 in total limits = 50% utilization. You want to shoot for under 9% total, the higher you go the more it affects your score. Util is 30% of your FICO score and can bring it WAY down.

DTI = monthly required debt payments / gross income

2. As long as you are in the same field, then no problem.

3. You are fine then, no worries.

4. I would honestly be looking at a car in the $20-25k range to make things more comfortable. Although can probably afford it, the problem with buying a $40k car at reasonable terms is that you will quickly be upside down on the loan without a sizeable down payment, but that is a large payment for a car, insurance will be higher obviously, so it just doesn't make sense to me unless you are a debt free person who has a stable living situation for the term of the loan and no desire to sell the car until it dies. No reason financially you can't though.

[Anonymous]

Gotcha. So I should be in a much better boat once my credit card is paid off by January (If I'm understanding correctly). I'd rather not get some ridiciously rate, but I'm sure I could refinance in a year with my CU or even bank.