Explore Important Factors that Lenders Need to Consider Before Giving Auto Loan Approval
Posted by admin at 3 November 2019, at 16 : 52 PM
Cars are an integral part of everyone’s existence and way of life today. Thanks to the organized lending sector purchasing a vehicle has become quite easy. There are a plethora of auto loans available in the market today. Hence, buying a car seems to be quite straightforward. As per https://www.forbes.com, the ever-increasing auto loan debt in the United States demonstrates no indications of slowing down. Americans are still struggling with overpowering levels of debt due to car loans.
Moreover, Americans owed over $1.16 trillion in terms of auto loans in March 2019. If statistics were to be believed auto loans in the United States accounted for almost 10 percent of the consumer debt outstanding as of 2019 (1Q) including mortgages. In 2018, Americans are known to have originated over 27 million brand new car loans, approx. 183,000 more as compared to 2017.
In this context, you must know that auto delinquencies are gradually piling up in the United States, revealing the pain, distress, and emotional turmoil of millions of people. The sorry state is partly because of some auto lenders who kept on issuing credit more freely. They must have been approving loans for people with lower credit scores and they were also too happy to trust borrowers and their word instead of examining the credentials or doing a thorough background check. They issued auto loans to many such borrowers without verifying their income. Hence, now is the time for the lenders to be doubly careful and be strict about all the necessary verifications before approving an auto loan. It is their responsibility to make sure that they are approving auto loans to people who are genuinely concerned about paying back the money. They must mitigate all risk factors before considering a loan approval. Here are some of the critical factors that all lenders must consider before opting for an auto loan approval.
Current Credit Score & Credit History
Banks and other auto lenders have a preference for borrowers with genuine and clean financial habits. You know that a credit score is the best indicator of your overall financial health. A borrower’s credit report helps to reveal to the lenders his precise financial condition. Lenders must examine carefully if the loan applicant is paying his EMIs timely or defaulting, simply by scrutinizing his credit report that is usually maintained by diverse bureaus. However, lenders must check the credit scores from the top three authorized credit bureaus: Experian, Equifax, and TransUnion. These three chief credit bureaus are instrumental in capturing, updating, and storing credit histories on consumers in the United States. Even though most of the collected data or information on American consumers by these three chief credit bureaus seems similar, some differences are often evident. Usually, the best credit score is 800 and a good credit score is anything between 700 & 800.
All auto lenders must reject the loan applications of people with credit scores of 300 or even less. If you are having a robust credit score maintained by one of the most trustworthy credit bureaus, lenders would send loan approvals quickly and with less verification by the lender. If you are having a low credit score, lenders would be specifically scrutinizing your previous auto loans and their payment history. If you are having a good payback history on your auto loans, you could still obtain car loans at relatively reasonable rates. Lenders must necessarily evaluate your overall financial responsibility, reliability, and history while deciding whether to approve a loan. Lenders are supposed to determine their acceptable risk level that they would like to take on. Since it varies, we understand that it is difficult to define definitively what comprises a ‘bad’ or ‘subprime’ credit score. A borrower’s overall credit background would help a lender to determine if he would like to work with him. You may browse https://www.libertylending.com/ for seeking professional assistance from lending experts and understanding their loan acceptance levels.
Income
Lenders put major emphasis on verifying a borrower’s income. It is important to understand that income requirements generally vary from program to program but it is strongly recommended by financial experts that lenders approve loans to applicants with a minimum of $1,500 pre-tax. It is a good idea for lenders to examine a loan applicant’s surplus income. Lenders would be happy if borrowers can show that there is an adequate surplus even after payment of EMIs. Lenders feel that candidates could pose risks if they have low surplus income as they would be financially stretched and there is a likelihood that they may default on their auto loans. Car loan eligibility would go up in the event of joint auto loans since the repayment capacity would be going up. If your income seems insufficient for supporting an expensive auto loan burden, you are compelled to choose another vehicle that seems cheaper. However, in the event your spouse is working, your income along with your spouse’s income would be factored in while determining your repayment capacity.
Experience & Job Stability
Banks and other lenders must always ask a borrower about his work experience and his stint at his current job. This is simply because the longer a borrower serves at a particular job, it would earn him more brownie points with the bank. While considering bad credit loans, lenders must see if they can spot some stability somewhere. A steady job and a reasonable work experience at a specific organization demonstrate that the borrower’s income is steady so paying back the auto loan should not pose any issues.
Debt-to-Income Ratio
Auto dealers and lenders would be examining your debt-to-income ratio. Lenders must calculate a borrower’s DTI accurately by adding up all his existing monthly bills and then dividing that amount by his monthly pre-tax income. Most auto lenders are looking for the DTI ratio to be at 50 percent or less.
Down Payment
Most bad credit loan programs need some kind of down payment. This could be either in the form of equity or cash or a mix of both. If you can’t arrange any down payment, lenders would be hesitating to approve your auto loan. When you pay money down, it would give you equity in your car, reducing the interest amount you need to pay and shortening the loan term in some cases.
Conclusion
Even though you may find it pretty surprising, the fact remains that the kind of credit present in your portfolio leaves an impact on your overall credit score. Unsecured loans like personal loans or credit cards are regarded as bad while secured loans like auto or home loans are regarded as good. Lenders must carefully and patiently examine the factors discussed above before approving an auto loan.