For car buyers with questionable credit it can be very difficult to predict what interest rate they might qualify for until after the auto loan application has been approved by a lender
What we know
Usually one of the first questions we get from car buyers with problem credit is what interest rate they should expect on a car loan.
The fact is that here at Auto Credit Express we’ve been helping car shoppers with poor credit looking for online car loans find those dealers who can give them their best opportunities for an approval. But unfortunately we still can’t answer this question even though we understand the frustration this can cause buyers. Here’s why:
Auto loan interest rates
Consumers with good credit (normally considered to be a FICO score between 720 and 740 and above) can normally check with traditional lenders that assign interest rates based on credit scores. For these buyers this makes comparing lenders and rates easy.
Even applicants whose FICO scores fall between 640 and 700 will sometimes qualify for credit score only-based rates.
But when the credit scores of an applicant fall below 640, most of these traditional lenders will turn down the application. At this point, the only option for most buyers is apply for a higher-risk auto loan.
More than FICO scores
When looking at an application from someone that has encountered problems with their credit, subprime lenders look past the poor credit scores and, using special scoring systems that take into account additional factors, assign approved applicants to a credit tier that will determine the interest rates based a vehicle’s age and mileage.
These scoring systems typically consider these criteria:
Can the applicant afford a car payment? These scoring systems first look at an applicant’s income. They then review that individual’s monthly bills to calculate a debt ratio. This is done because most of these lenders want an applicant’s overall debts, including a car payment, not to exceed 40% to 50% of their total monthly income. The lower this debt-to-income (DTI) ratio turns out to be, the better an applicant will score.
Most high risk lenders also prefer a monthly car payment that’s less than 15% to 20% of an applicant’s total monthly income. The lower this payment-to-income (PTI) ratio is the better an applicant will score.
Larger down payments also will improve the chances of an approval. Cash down reduces the loan to value (LTV) ratio, lowering the lender’s risk. The result is that the lower the LTV ratio is the better an applicant will score.
Stability typically takes two things into consideration. The first is how long an applicant has been employed at the same company or in the same field.
The second deals with how long that person has lived at their current address or in the same area.
In considering job stability, lenders look for a minimum of one year with the current employer with higher scores given for additional job time. Shorter job tenure can be offset by employment in the same industry while switching employers for more job experience or higher pay is also acceptable.
Residence stability – living for an extended period at the same address or in the same geographical area – also indicates financial stability. Lenders consider people who move frequently as potential “skip hazards”. In this case if a vehicle needs to be repossessed, these lenders want assurances that, if need be, they’ll be able to find it. The longer an applicant has lived at their current residence, the better they’ll score. Also, homeowners score higher because it’s more difficult for them to move than it is for renters.
Willingness to pay
Finally, higher-risk lenders will review an applicant’s credit reports to study that individual’s bill payment habits – especially auto loans. If they find “slow pays”, they’ll check to see if this is a “situational” or “habitual” issue.
Here’s the difference: Late payments resulting from a single incident, such as a layoff or medical emergency are considered “situational” bad credit.
Never paying anyone on time is labeled “habitual” bad credit. It should go without saying that applicants with “situational” payment problems will score higher than those with habitual payment issues because those with “situational” bad credit have exhibited previous responsible credit behavior.
The Bottom Line
Lenders take into account ability, stability and willingness to pay when determining the interest rates of high risk car loans. Since each one considers these factors differently, the interest rate any individual will get can’t be answered until the application is approved.
One more thing: at Auto Credit Express we match applicants that have experienced car credit problems with dealers that can give them their best chances at car loan approvals.
So if you’re ready to reestablish your auto credit, you can begin now by filling out our online car loans application.