Most states require a dealership to collect all sales tax at the time of purchase. Dealerships generally include all taxes, title fees, and any other fees in the total sale price of a vehicle. Since the total sale price of a vehicle is the amount a lender will consider when deciding whether to approve or deny an auto loan, the answer comes down to your credit score and down payment – are they high enough? If so, you may be able to obtain a car loan that covers covers tax, title, and other fees.
Credit and Loan-to-Value Ratio
A lender will consider whether the loan amount is too high in relation to the value of the vehicle. This is known as the loan-to-value ratio, or LTV, and the maximum threshold will be dependent on your credit score. If the LTV is excessive, you may be asked to offer more of a down payment to cover the gap. On the other hand, if you have an excellent credit score, lenders may waive a higher down payment and assume the additional risk of the loan exceeding the value. Many lenders will finance up to 120 percent of the vehicle’s price for people with good credit. Obviously, that 20 percent is plenty to cover taxes.
The Role of Gap Insurance
Under either circumstance, a lender may require you to carry gap insurance to minimize the risks associated with a loan balance that is more than the value of a vehicle. This insurance can be expensive, so it may be in your best interest to have a down payment that is equal to 15-20 percent of the total sale price of the vehicle you are wanting to finance. A higher down payment will improve your chances of getting a loan, keep you from having to carry gap insurance, and lower the amount of interest that you will pay over the life of that loan.