Auto Loans and Credit Scoring
by Dave LaLonde on Monday, August 13th, 2007When it comes to getting an auto loan with bad credit, most lenders have a score card that they use to rate your credit worthiness and risk. Rarely will sub prime lenders rely on the credit bureau score alone when making their decision whether to approve or decline an auto loan application. Following are a few examples of items that may be part of a sub prime auto lenders score card.
Time in Bureau
Many lenders use the “In Bureau Date” as part of their score card, the longer a person has been in the bureau system the better.
Previous Credit High
Finance companies may look at your previous credit high to determine the loan amount that they will approve.
Installment vs. Revolving Credit
When it comes to auto loans, many lenders disregard revolving credit (credit cards) and play close attention to previous installment loans.
Time at Current Employer
The longer a person has been with their current employer, the better.
Time at Current Residence
If a person moves around a lot this tends to scare lenders. Consumers that move a lot are considered to be “Skip Hazards”. In other words, if a lender has to repossess a vehicle they want to know where they can find it.
Debt to Income Ratio
It’s not how much you make, it how much is left over that the lender focus’ on. In most cases lenders prefer that all your debts, including the new car payment, not exceed 40% to 50% of your gross monthly income.
Payment to Income Ratio
Most lenders prefer to approve loans with monthly payments that are below 15% to 20% of a consumer’s gross monthly income.
Loan to Value
If you have bad credit, the more money down used the better. More money down decreases the Loan to Value of the loan and decreases the lenders risk.
Not every sub prime auto lender uses all the items described above in their score card, but the score card exists to evaluate the risk of the auto loan. Once a lender decides to approve a loan they use their score card to determinate the interest rate, the higher the perceived risk of the loan, the higher the rate will be.
For example, let’s say two people, Bob and Betty, applied for an auto loan, for the same $10,000 vehicle, and each had a credit score of 575.
Bob is 24 and has been in the credit bureau for only two years. He has never had an installment loan, only credit cards. He has 6 months on his current and previous job, and still lives at home with his family. His income is $1,800 per month. Bob is trying to buy the car with no money down with sales tax and registration fees he is asking to finance $10,800.
Betty is 32 and has been in the credit bureau for only twelve years. She has had three auto loans in which she paid okay but filed bankruptcy two years ago due to unexpected medical bills. She has 8 years with her current employer and 5 years at the same residence. Her income is $3,500 per month. Betty has $2,500 cash down; with sales tax and registration fees she is asking to finance $8,300.
The same lender is willing to approve both Betty and Bob, however, they view Bob’s loan as a riskier transaction than Betty’s. Bob is approved at a 22% interest rate while Betty is approved at a 13% rate.
To say the truth I’ve heard about score cards but I’ve had no idea what aspects can these cards include. Due to your post I’ve learned more about score cards.
I recently applied for a auto loan with a dealership and was aware of my credit score prior to applying. When the dealer advised me of what my interest payment was, I questioned them on why the interest was so high they told me that it was because of my credit score when I asked them what the score was the score that they gave me was much lower than the score that I had obtained from the same reporting bureau within a 24 hr. period Why is this?
Thanks
There is a logical reason for the difference in credit scores, even from the same bureau. Although the car dealer as well as the bank lending you money for your car are interested in your credit history, they will both pay special attention to how you have paid on car loans in the past. The credit bureau, knowing this, gives them a special version of your credit score that is weighted (or biased) towards your car loan payment history. While your overall score (the one you received) may be one number, it is very possible that, depending on how you have paid on your car loans in the past, your score could change with the scoring model the car dealer and the bank used.