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Refinancing Car Loans on Social Security Disability

Car Loans for People on Disability Income
Austin Kilham
Austin KilhamUpdated December 20, 2022
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For those whose primary source of income is Social Security disability, obtaining a car loan can prove more difficult. It becomes even more challenging for those with  bad credit, due to the fact that Social Security benefits cannot be garnished. Bad credit lenders look for proof of garnishable income in case a borrower defaults on their loan and the lender needs an avenue through which to recoup their money.That said, if you rely on Social Security disability for income, there are still options for where a person on Social Security disability can get a car loan. It’s also possible to refinance a car loan for people on disability.

What Is Social Security Disability? 

If you’ve been injured on the job or are unable to work due to illness or another impairment, you may be entitled to receive monthly Social Security Disability Insurance (DI) payments. DI is part of the same government program that issues Social Security retirement benefits.Disability benefits are available to workers and certain family members as long as they’re “insured.” This means that they must have worked long enough and paid Social Security taxes on their earnings.Benefits are generally paid out as long as your condition has not improved and you remain unable to work. The Social Security Administration reviews cases periodically to determine whether or not an individual still qualifies to receive payments.

Car Loan Interest Rates and Social Security Disability

When lenders consider what rate for a car loan to offer when you apply, they’re thinking largely about risk. That’s why they’ll take a look at your credit score, which can give them an idea of your history of paying off your loans on time. A higher score suggests you’re likely to make on-time payments, which in turn means that lenders are more likely to offer you a lower interest rate. Borrowers that are seen as more risky — for example, those with lower credit scores — are less likely to qualify for loans with lower interest rates. Lenders will make similar risk calculations when looking at your income. They will want proof of a steady source of income that you can use to pay your bills (unless, of course, it’s a no income verification car loan). On the face of it, Social Security disability should fit that bill. However, as mentioned above, because Social Security wages are not garnishable, your lender has no recourse to access them if you default on your loan. That bumps up the risk quotient for the lender, and as a result, they may charge a higher interest rate. Unfortunately, this will increase the overall cost of your loan. 

Refinancing a Car Loan on Social Security Disability

When you refinance a car loan, you take out a new loan — ideally, at a lower interest rate or with better terms — and use it to pay off your old loan. Refinancing can make sense if interest rates have dropped or your finances have improved, helping you qualify for a loan with better interest rates that will save you money over the life of the loan. Refinancing can also be a way to make monthly payments more manageable. By refinancing to a new loan with a longer term, your monthly payments should drop. However, you’ll be paying interest on your loan for longer, which can ultimately increase the cost of borrowing.If you’re refinancing an auto loan while collecting Social Security disability, you may run into some of the same challenges as you would when applying for an initial loan. Lenders may be hesitant to extend credit. The following strategies may help you qualify.  

Social Security Disability With a Job

It is possible to work and still receive Social Security disability. In 2022, for example, workers could make up to $1,350 a month before their benefits would stop.That said, work expenses — such as specialized equipment needed to work, a wheelchair, or an attendant — are deducted when your earnings are counted. This may mean that you technically can earn much more than the $1,350 limit, depending on your circumstances.With a higher income — and with a portion that’s garnishable —  lenders may be more willing to extend credit for an auto loan or an auto loan refinance.

Social Security Disability With a Cosigner

Applying for a loan with a cosigner can increase the chances you'll get approved for a car loan if your income comes from Social Security disability. A consigner is usually a family member or a close friend who agrees to share responsibility for a loan and who better meets the requirements for a car loan. By cosigning, they promise that if you default on your loan for any reason, they will step in and pay the bill. Be aware that your loan will show up on your cosigner’s credit report as well. That means that if something goes awry with the loan and a payment is missed, it will hurt both of your credit scores. 

Social Security Disability With Bad Credit

If you have bad credit, you may be able to purchase a car at a “buy here, pay here” dealership. They handle financing in-house instead of through a third-party lender. That means they can offer buyers any terms they want, and they may not even run a credit check. This can help you get around ​​car loan credit score requirements.The catch: These dealerships may offer you older used cars with higher mileage. Further, they may not report on-time payments to the credit reporting bureaus, which won’t help you to improve your credit score.

Approval Process for People on Social Security Disability

When applying for an auto loan while on Social Security Disability, you may want to save as much as you can for a down payment. This can help to increase the chances you’ll qualify for a loan. Also make sure to prepare proof of any secondary sources of income that produce garnishable wages.Additionally, you'll want to become familiar with your credit score, and do what you can to improve it. This may mean paying bills on time, or paying down other debts before you apply for a new loan.Recommended: Shopping for a Car Loan

The Takeaway

While it may be trickier for people on Social Security Disability benefits to secure an auto loan or a refinance, there are some steps that can make it easier. This includes actions like using a cosigner and bringing in extra income, if you can. If you’re in the market for a loan, it’s important to shop around to help ensure you get the lowest interest rate possible and the best loan terms for you that you can. Lantern’s auto loan refinancing tool helps you compare rates from top lenders and makes it easier to apply for and accept a loan.Find out today what car loan refinance rate you qualify for.

Frequently Asked Questions

Can a person on Social Security disability get a car loan?
Do people on Social Security disability get better rates on car loans?
How long is the car loan approval process for people on Social Security disability?
Photo credit: iStock/BrianAJackson

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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