Meeting the Requirements of High Risk Auto Loansby Steve Cypher on Wednesday, October 24th, 2012
If you need a car but have concerns about your credit, you should be familiar with some of the basic conditions that typically need to be met for most bad credit auto loans.
At Auto Credit Express we’re familiar with most of them because for over twenty years we’ve been helping car buyers with past credit difficulties by matching them with dealers who can offer them their best opportunity for approved car loans.
And while we don’t mean to discourage anyone from applying, we also want to make it clear that even subprime auto lenders have guidelines that need to be followed.
To begin with, applicants should know at least one of their credit scores (most people have at least three – one from each of the major credit bureaus. The highest risk car lenders typically deal in the 550 and above FICO score range, although some will go as low as 500. Scores over a 640 FICO are usually considered to be near-prime, while prime rates usually begin anywhere from 720 to 740.
Although higher risk lenders also offer loans to near-prime customers, credit unions, captive finance companies and a few banks are occasionally willing to work with these customers and typically can offer better interest rates.
The next situation that needs to be addressed is that applicants typically cannot be credit “ghosts” (a person with little or no history showing in their credit file). Unless you’re young and applying for a car loan under a college grad program, having a credit history of at least 3 years is usually considered a minimum. Also considered a plus is having at least one prior auto loan showing up in your credit reports.
Monthly income levels can vary by lender, but anywhere from $1,500 to $1,800 gross (before taxes) is normally the minimum income needed to qualify. It also goes that the higher the income, the larger the available selection of vehicles (and lenders) will usually be.
Another thing that has to be considered is that once the income level is met, lenders will then go about comparing it to the total monthly debt level. This result of this is the applicant’s debt-to-income ratio that determines if there is enough available income to qualify for a car loan plus the added cost of auto insurance.
The ratio most lenders want to see is that an applicant’s total monthly bills, including both the car and insurance payments, are not more than 40% to 50% of their monthly gross income. In addition, most poor credit lenders prefer a monthly vehicle payment that’s less than 15% to 20% of a borrower’s total monthly income.
The down payment
Most high-risk lenders will also require a down payment, either in cash or actual trade equity. This is done because it’s been shown that customers that have their own money invested in a vehicle tend to keep making their monthly payments on time. Ten percent or $1,000 down (whichever is less) is usually considered to be the minimum amount – while larger down payments will not only reduce the monthly payment but can also increase the chances of a loan approval.
These higher risk lenders will also usually not allow an applicant to have more than one car payment at a time. If a vehicle is currently being financed, it will either have to be paid off or traded in. In addition, they will also not finance a commercial vehicle, conversion van, motor home or anything with a branded title (salvage, rebuilt, etc.).
• Job time – The longer the better. Short job tenure can be offset by situations such as higher income, employment in the same field, lengthy residence time or home ownership.
• Bankruptcy – Tin most cases these lenders will not finance someone with either an open or multiple bankruptcies. A few will consider someone in an open Chapter 13 but, even then, a court order to incur additional debt is required before they’ll review the application.
• Accuracy – Be prepared to back up anything stated on the application (residency, wages, employment) with proof. Note: this is not the time to begin a new “creative writing” career.
Where to begin
One of the best places to start the process is at Auto Credit Express where specialize in placing applicants with those franchised new car dealers that can offer the best chance for approved auto loans.
So if you’re ready to establish your car credit, you can begin now by filling out our online auto loans application.