Does Credit Card Debt Affect a Car Loan?

Quick Answer

A lender will review your credit card debt when it’s deciding whether to give you a car loan. Credit card debt can make it tougher to qualify for the loan, obtain a lower interest rate or keep up with car payments.

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When you're shopping for a car loan, you'll want to figure out how much car you can afford, how much money you can put toward a down payment and the monthly payment amount you're willing to pay. You also shouldn't overlook the role that your credit card debt can play.

Lenders consider your existing debt when approving a car loan because it can affect your ability to afford your monthly car payments. A large amount of credit card debt can make it harder to get approved for an auto loan and result in less appealing loan terms being offered.

How Does Credit Card Debt Affect Auto Loan Approval?

Credit card debt can affect an auto loan in several ways. Here are some of them.

Qualifying for a Car Loan

Your credit card debt can impact your ability to get a car loan, especially if you're carrying a lot of it. If your debt levels are too high compared to your income, a lender might even reject your application outright. If your credit card debt is under control, however, a lender is more likely to approve a loan application.

When you apply for a loan, a lender typically looks at your debt-to-income ratio (DTI). DTI, which factors in your credit card balances and other debt obligations, measures how your existing debt compares to your income. Generally, a DTI of 36% or lower is considered ideal for obtaining great terms for a car loan, while a DTI above 50% might result in a higher loan interest rate or cause your application to be turned down.

Your credit score also carries a lot of weight in the approval process for a car loan, but how much of an impact it has on your approval odds varies from lender to lender.

Securing an Attractive Interest Rate

Significant credit card debt on your credit report might cause a lender to think you're a risky borrower. As a result, you may be charged a higher interest rate compared to a borrower who has less credit card debt. A lender will evaluate your DTI to help determine what your interest rate will be.

Being Able to Make Car Payments

Carrying a lot of credit card debt could make it tougher to afford car payments, or the addition of a car payment might make it more difficult to afford credit card payments. If you make late payments or miss payments altogether for either type of debt, it could lower your credit score. Payment history makes up 35% of your FICO® Score .

How to Get the Best Terms on an Auto Loan

When you're looking for a car loan, you obviously want to score the best terms, such as a low interest rate. Follow these tips to help get the best terms on an auto loan.

Shop Around for a Lender

Check interest rates, fees, repayment details and other factors with several lenders to find the auto loan that best fits your needs. Consider getting preapproved for an auto loan before you go car shopping so you have a better idea of what you can afford to buy.

Make a Bigger Down Payment

Your down payment—which might be cash, the value of a trade-in or a mix of both—can affect your loan terms. A higher down payment can reduce your monthly payment amount and interest rate, while a lower down payment can do the opposite. If you can afford it, a larger down payment can result in more affordable loan payments and lower interest costs over the life of your loan.

Look for a Cheaper Car

When you buy a cheaper car, your loan-to-value ratio (LTV) should improve. LTV divides the amount you borrow by the appraised value of the car. A lower LTV can boost your odds of obtaining a lower interest rate.

Improve Your Credit

As you prepare to buy a car, taking steps to improve your credit may lead to better loan terms. Start by reviewing your credit report and score to see where you stand. Among the actions you can take to make you more appealing to a lender are:

  • Continuing to pay all of your bills on time
  • Paying off past-due accounts
  • Reducing the amount of credit card debt you're carrying
  • Reviewing your credit report to look for inaccuracies that could be dinging your credit score
  • Putting off applying for new credit, such as a credit card

3 Ways to Reduce Credit Card Debt Before Applying for an Auto Loan

If you want to whittle down your credit card debt before applying for an auto loan, here are five ways to do it:

  • Rely on a debt payoff method. Common debt payoff methods include debt consolidation, the snowball strategy and the avalanche strategy. They approach debt payoff a little differently, but either can help you delete high-interest credit card debt more quickly.
  • Reduce your spending. Finding ways to cut expenses allows you to put more toward slashing your credit card debt. For example, you might see whether you can cancel unused subscriptions or memberships, or eliminate some spending on entertainment.
  • Boost your income. To help pay off credit card debt, consider ways you can increase your income. Perhaps you can work extra hours at your job, take on a part-time gig or turn a hobby into a money-making venture.

Keep in mind that you may need to put your car-buying plans on hold while you're trying to reduce your credit card debt.

The Bottom Line

Credit card debt can play a big part in whether you receive favorable or unfavorable terms for a car loan—or get approved at all. You can do a lot to improve your credit situation before you apply for a car loan, though, such as paying off your credit card debt and working to improve your credit score. Free credit monitoring from Experian can help you view your progress as you go.