When you apply for a loan, you’re trying to appeal to a lender with your credit history and income stability. It boils down to a few points that lenders consider. These aspects of your credit history and current financial circumstances help lenders identify how big of a risk it will be to give you a car loan. It's all about risk and how likely you are to pay off your loan.
A credit score is a number that represents your creditworthiness. Lenders use this number (along with other factors) to determine if you qualify for a loan or not. Your score is determined by your credit history, how fast you pay off your balances, how many balances you have, how long you’ve had open accounts, how active they are, etc.
That credit history and current situation data is plugged into a scoring software, commonly FICO or VantageScore, which then calculates your credit score. The other thing to remember about credit scores is that there are different kinds that weight various aspects of your credit data differently. Lenders look at different scores depending on what type of loan they are considering extending to you. For example, auto lenders typically look at different credit scores than mortgage lenders or credit card lenders. Auto lenders look at your Auto FICO, which is calculated to evaluate your eligibility specifically for a car loan.
Most people think this is the most important part of obtaining a loan, but that is not always the case.
In some cases, like here at instamotor, lenders understand that life happens, and look beyond the credit score. In these cases, lenders look at the stability of your income.
To verify stable income lenders will typically ask that you provide proof of income and/or employment. You can verify your income or employment by providing banks statements or by using verification systems such as Plaid, Argyle or Decision Logic.
Loan to value is a ratio of how much (in the case of cars) your car is worth, vs how much your loan is for. For instance, a higher down payment will decrease your loan to value ratio because your loan amount is less while the value of the car remains constant. Lenders take this into account because it reduces the risk of you owing more on the car than it’s worth.
If the loan to value ratio is high and a borrower ends up defaulting on their loan, the lender won’t be able to recover the full loan balance when they repossess the car because the car is worth less money than the loan balance. Lenders determine the value of a car using data from a third party provider that specializes in car valuations. The most commonly used valuation providers are NADA, KBB and BlackBook. Different lenders have different thresholds for LTV and sometimes vary their LTV tolerance based on the borrower's credit quality.
Payment priority is a metric lenders use to understand how you prioritize paying back your different loans. In other words, if you have a car loan and a student loan, lenders will look at your history to work out the odds of you paying your auto loan over your student loan, if at some point in the future you only have the cash to make one payment or the other in a given month. This is an important aspect to be realistic about, so properly evaluate what is your priority when it comes to making payments.
DTI is Debt to Income—the ratio of how much money per month you owe to on existing loans or other obligations like rent against your monthly income.The way DTI is calculated varies by lender. For example, some lenders include rent while others don't, some lenders include student loan obligations while other don't. Lenders consider DTI to make sure you will be able to cover all of your monthly obligations with the additional new loan payment.
PTI is Payment to Income—the ratio of the monthly payment of the loan for which you are applying against your monthly income. In calculating PTI for an auto loan, most lenders add the estimated monthly cost of auto insurance to the monthly payment loan payment amount. PTI calculations and thresholds vary by lender. Usually, lenders look for someone who makes enough money so that the monthly car payment plus insurance only takes up about 15% of their monthly income.
Lenders may also consider a variety of other factors related to your current employment and work history. The most common aspect lenders look at is how long you've been employed at your current job or with your current employment. Some lenders consider your education, how long you've worked in your industry and if the industry you work in is stable or volatile.
Now that you know the most common factors lenders consider when evaluating a car loan application, you can adjust your budget and down payment amount to improve you chances. Knowing where you stand will put you in greater control of these factors. Increasing your down payment or looking for a less expensive car will improve the LTV, DTI and PTI of your application.
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