For auto moneylenders, it is good news when more and more people are taking out car loans. For most auto buyers purchasing a new car could be a thrilling experience, however, they have to go through some tedious exercises such as negotiating with auto salespeople or identifying the best auto loan. Statistics reveal that American auto buyers actually are used to taking out as much as few billion dollars in terms of auto loans every month, and the average new vehicle loan in 2019, has reached a record $31,722. That seems a huge amount of money that needs to be paid back. That also implies booming business for auto moneylenders.
However, if you are a lender who offers auto loans, you have to make sure that you get back the money you have invested. For ensuring that you do not lose any money in this deal, most lenders must take into consideration certain important factors and the borrower’s credit score is supposed to be one of the most critical factors. Lenders would wish to examine the borrower’s complete financial profile while making a decision whether to approve or decline a car loan request.
When borrowers apply for an auto loan, as a lender, you must focus on assessing your accurate credit risk depending on multiple factors including the borrower’s income, payment or credit history, and his overall financial situation. Let us explore the important credited-related factors that you must look for while examining a borrower’s loan request.
As per https://www.nerdwallet.com, a credit score is actually supposed to be a three-digit number that is calculated taking into account the information present in a person’s credit report which has been designed for predicting his chances of repaying the borrowed money. However, a credit score may not tell you all about your borrower, and you would need to meticulously examine his credit report to get a comprehensive understanding of his current financial position.
As a lender it may be a good idea to look for:
- Unpaid collections accounts.
- A past bankruptcy.
- Delinquent accounts, implying those accounts that were paid over 30 days late.
- Outstanding Debts.
- The exact number of credit applications you put in recently.
- Civil judgments or tax liens- however, from July 1, 2017, it has been established that the credit bureaus would only be reporting these provided they include a birth date or the Social Security number for identifying information.
In this context, borrowers must know that their credit history is an important determining factor in the loan eligibility and approval process. They could qualify for a loan only if they are having a robust credit history or the track record a borrower has already established while he was making loan repayments and managing his credit over a period of time. A person’s credit report is actually a comprehensive list of all his credit history comprising information that is provided by the lenders who had given him credit in the past. Even though the precise information may differ from a particular credit reporting agency to some other agency, you would find that a credit report would be including same kinds of information, like the credit types you are having, the lender names who have provided the credit, the borrower’s payment history, etc.
Moreover, besides the credit report, most lenders may rely on a borrower’s credit score which is generally, a numeric value between generally, 300 and 850 which is primarily based on whatever information is present in his credit report. For a lender such as Liberty Lending, a borrower’s credit score definitely serves as an important risk indicator. Usually, the lower the credit score, the higher the risk and vice-versa.
The credit bureau scores are also, referred to as the FICO scores. Many lenders are in the habit of examining credit scores and taking them into account while finally, making their lending decisions; however, different lenders have their own criteria, based on the exact level of risk they think are acceptable for a particular credit product. As per USNews.com, a person has many credit scores since different credit reporting organizations or agencies use diverse techniques of determining the credit scores. However, the three major credit bureaus are TransUnion, Experian, and Equifax. Scores from one particular scoring model cannot be compared directly to scores from other models.
If someone has a relatively higher credit score, lenders would easily qualify him for the car loan with a really low-interest rate and would accept his loan request. Typically suppose a car loan applicant has a high credit score of 720 and steady employment, he should be having any issues getting the required financing. Even though it is less crucial, the more significant factor is actually the accounts’ age and precisely when was the last transaction that took place. Lenders are looking for stability and in case there are several recent account openings, you would notice that a person’s credit score would experience a major dip. Finally, a credit score would be reflecting the latest attempts at securing credit. On each occasion, a potential lender asks for your precise credit score, it is bound to adversely impact your score.
Capacity to Repay Debt
Perhaps the most important assessment for a lender is whether a prospective borrower can actually repay their debts without issue. Typical indicators of their ability to meet monthly payments include their income details and employment history. Small aspects such as job industry, stability, and type of income are all going to be considered so that an informed decision can be reached. Another popular metric among lenders today is the debt to income ratio, which is the ratio of current debts to pre-tax income for the borrower.
Collateral or Security
The two broad categories of loans are unsecured and secured. An unsecured loan operates solely on the promise of the money being returned and is a greater risk for the lender, which is why these loans typically have higher interest rates. Secured loans, on the other hand, tend to keep some asset belonging to the borrower as security or collateral against the loan. This means that in the instance that the borrower defaults on the loan and is unable to repay it, the collateral shall be seized by the lender or the outstanding debt amount shall be deducted from the value of the collateral.
Capital Available to Borrower
Borrowers are not limited to the primary source or household income when it comes to loan repayment. Another factor taken into account is the capital; which is the assets, savings, investments and other available avenues for repayment that they can pursue if the need arises.
Conditions and Contingencies
Some lenders prefer knowing what use their money will be put to, while others might even consider the state of the economy and other small and big factors before extending a line of credit to a borrower.
Borrowers are almost entirely at the mercy of lenders when it comes to dictating terms. A shoddy income history over the previous 24 months or so could be a major red flag for someone who values stability, and a rough patch related to employment could also stand out. Depending on the borrower, the red flags could mean outright rejection or steeper terms like higher interest rates or shorter loan period. To ensure approval and terms that are favorable, you should really work on building credit and developing good behavior such as spending only as much as you need to, keeping the balances low on your credit cards and paying all your bills on time.