Most people in America prefer dealership loans for car purchase over banks. This is because dealers don’t completely rely on credit scores for loans and look into other factors as well. This is advantageous for individuals who have a low credit score. Here are some of the things financers look at while considering a potential borrower:
The credit score is not enough
One of the biggest misconceptions of buyers who are looking for auto financing is that a good credit score is all one needs to get the loan approved. But a good credit score is not enough.
The credit score is the main thing that lenders look for while auto financing but they need to know the entire financial status of the buyer before approving the loan.
A credit score is a three-digit number that determines a person’s financial health and his/her ability to pay back the debts. Based on this number, the lenders decide whether a buyer qualifies for a loan or not. A credit score is determined from three factors, the number of active accounts, debt repayment history, and debt accumulation status.
But just the credit score won’t do for the lender. To get a clear idea about the buyer’s financial status, the lender looks into the credit reports. Credit reports record information about the type of loans and credits received, delinquent accounts, any past with bankruptcy, outstanding debts, the number of accounts, and the active ones and credit history. It also includes information about the individual’s residence.
Employment history is another important detail the lenders take into consideration when it comes to auto financing. A good employment history means a stable income which again makes the person good enough to get approved for the loan. But if the individual has a spotty history, i.e, if they have a history of jumping jobs, it could be a matter of concern for the lender. As a result, the buyer will end up getting higher interest rates. A bad employment history can be quite a big problem even if the buyer has a high credit score. What the lenders are looking for is at least two years’ worth of consistency in the same company.
Like employment history, the lenders also tend to look into your income. Where stability in employment is rewarded with lower interest rates, personal income reassures the lender that the borrower can pay back the installments on time.
A person with a higher income is favored due to the assumption that they can pay off the debts on time. People with a good stable income and a debt-to-income-ratio of 43% or less can get auto financing at good rates.
One is more likely to get approved for an auto loan if he/she has liquid assets to cover the repayment process. While most lenders are convinced with a low debt-to-income-ratio, some reputed lenders seek to know if the buyer has any financial assets like savings, stocks, certificate of deposits, or other investments. This is to get an assurance that the borrower can continue making the payment without a break even in cases of crisis. The buyer is more likely to get auto financing if he/she has liquid assets to cover the loan.
Loan-to-value is the ratio stating the price of the car against the loan. Lenders look into the actual price of the car to know whether it acts as collateral. Higher down payment will decrease the loan-to-value ratio as the loan amount gets low while the price of the car remains the same. Lenders consider this as it reduces the risk of the buyer owing more than the actual price of the car.
If the loan-to-ratio value is high and the buyer fails to make the payments, the lender can repossess the car. But it won’t be able to cover the balance amount as the original price of the car is less than the balance amount. So, for the ones with a higher loan-to-value ratio, the lender proposes a higher interest rate, to compensate for the possible risks.
Professional occupational license
If the buyer is a lawyer, doctor, engineer, a licensed tradesperson, a financial planner or the likes, then the lenders feel more confident in auto financing. People with such professional occupational license show a higher chance of having a stable income than the others.
Lenders would need to know about how the buyer prioritizes paying back the loans. For this, the lender looks into the buyer’s history to chalk out the possibilities of prioritizing auto finance over the others. This is very important as they then get an idea of how the buyer plans to spend the borrowed money.