When it comes to getting an auto loan with financing car bad credit, most lenders have a score card that they use to rate your creditworthiness and risk. Sometimes called a credit score or FICO score, this is not the only tool these lender use.
Rarely will sub prime lenders rely on the credit bureau score alone when making their decision whether to approve or decline financing car bad credit loans. While the FICO score is the place that they start, these lenders always look beyond your credit score to try and find an underlying pattern of stability that will enable them to approve your application. Based on experience, here are a few examples of items that may be part of a subprime car lender’s score card:
The first item is your time in the credit bureau. Many bad credit car lenders use the “In Bureau Date” as part of their score card. The longer a person has been in the bureau system and using credit, the better. This longevity means that you have a bigger credit file with which they can judge your payment history.
A second item would be your previous high credit. Finance companies may look at your previous credit high to determine the financing car bad credit loan amount that they will approve. If you’ve paid well on a large loan in the past, this generally increases your chance of getting approved for a car loan.
A third item would be any differences in paying installment credit versus revolving credit. When it comes to auto loans, many bad credit lenders either disregard or pay less attention to revolving credit (credit cards) and play closer attention to how you’ve paid on previous installment loans. The reasoning behind this is that a car loan is a type of installment loan.
Item number four is the time you’ve been employed with your current employer. The longer you’ve has been with their current employer, the better. If you’ve been employed by the same company for a number of years, it shows the lender that you have employment stability – an important factor in most credit decisions.
Item number five has to do with how long you’ve been at your current residence. If a person moves around a lot this tends to scare lenders. Consumers that change their primary residence often are considered to be “Skip Hazards”. Quite simply, this means that if a lender has to repossess a vehicle they want to know where they can find it.
Another item financing car bad credit lenders consider is your debt to income ratio. Known as DTI, it focuses not on how much you earn, but how much of your gross pay is left over after you pay your bills. In most cases, lenders prefer that all your debts, including the new car payment you are about to add, not exceed 40% to 50% of your gross monthly income (not your take home pay, but the total amount before taxes).
Lenders also look at your payment to income ratio. Referred to as PTI, you should know that most lenders prefer to approve loans with monthly payments that are below 15% to 20% of a consumer’s gross monthly income.
Finally, lenders look at another ratio: loan (amount) to value (of the car). Called LTV, it means that if you have bad credit, the more money you can contribute as a down payment, the better the loan will look to the bank. More money down decreases the loan to value of the loan and decreases the lenders risk. As an example, if you put $5,000 down on a $10,000 loan, the LTV is 50%.
Not every financing car bad credit lender uses all the items described above in their score card. But their score card, no matter what it contains, exists to evaluate the risk of your auto loan. Once a lender decides to approve a loan they use the information derived from their score card to determinate the interest rate of your loan. The higher the perceived risk of the loan, the higher the rate will be. Here are two examples:
John and Jane apply for an auto loan, for the same $10,000 vehicle, and both have a credit score of 595.
John 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 with his current employer and another 6 months with a previous employer, and still lives at home with his family. His income is $1,800 per month. John is trying to buy the car with $1000 down. With sales tax and registration fees he is asking to finance $9,800.
Jane is 32 and has been in the credit bureau for a total of twelve years. She has had three auto loans in which she paid okay. Two years ago she filed for bankruptcy due to unexpected medical bills. She has 8 years with her current employer and she has lived at the same address for 5 years. Her income is $3,500 per month. Jane has $2,500 cash as a down payment. With sales tax and registration fees, she is asking to finance $8,300.
The same lender is willing to approve both Jane and John. However, they view John’s loan as a riskier transaction than Jane’s. John is approved at a 22% interest rate while Jane is approved at a 13% rate.
When it comes to financing car bad credit loans, your credit score is just the starting point. In addition to your FICO score, these lenders are looking for a reason to approve your loan, based on your job and residence stability, as well as your past payment history.
Tags: Car Credit, used car financing