The car loan market waxes and wanes. As it moves so does the ability to get a car loan if you have a tax lien. When the loan market is lenient, as it is now, it is fairly easy to get a car loan with a tax lien. The tax lien does make you more of a risk than other customers, so here are a few things to expect when you apply for a car loan.
Credit Report and IRS Wage Garnishment
As with all loans your credit report will be pulled, no surprise there. If your report shows any other late payments, you will most likely be denied for the auto loan. A tax lien is one thing, multiple delinquent accounts is a habit that will not be overlooked. Additionally, the potential amount that the IRS may garnish from your wages may be considered as part of your debt-to-income (DTI) ratio. If it is and that pushes your DTI above the 40 percent mark, your application will most likely be denied.
20% Down Payment
With a tax lien you will not be able to take advantage of zero down payment offers. In fact, you will most likely be required to offer at least twenty percent of the total purchase price as a down payment simply because the lien is showing on your credit report. This is because banks hedge their bet on a risky loan (tax lien equals risky to a lender) by requiring more money upfront.
Interest Rate and Loan Term
Here is where the lender is really going to hedge its bet on your loan. After requiring more money down, you will most likely be offered a sub-prime rate. Depending on the lender that could mean a rate that is as much as fifteen points above prime. Given the current prime rate, that means you could be asked to pay up to eighteen percent. In addition to the high interest rate, the tax lien may mean that you will not qualify for a longer loan term. You may be required to repay the loan as quickly as 30 months.
Your best bet is to delay buying a new car and pay off the tax debt instead. The lien will remain on your credit report for seven years, but will do less damage if it is marked paid in full. The hit to your credit score will also fade with time.