Predicting High Risk Auto Loan Interest Rates
For car buyers with less than perfect credit it is usually difficult to predict an interest rate until the loan has been approved
Approved car loans
If they have any, usually one of the first questions we get from credit-challenged car buyers is what interest rate they should expect.
Unfortunately, after over twenty years of helping car shoppers with credit issues here at Auto Credit Express, we still can’t answer this question – even though we understand the frustration this can cause.
Here’s why:
Interest rates with bad credit
To begin with, for people with good credit (normally considered to be a FICO score between 720 and 740 and above) traditional lenders can assign car loan interest rates based on their credit scores. This makes comparing lenders and rates easy.
Even applicants whose FICO scores fall between 640 and 700 sometimes qualify for credit score only-based rates.
But when FICO scores fall below 640, most traditional lenders will turn down the application. At this point, typically the only option is to apply for a high-risk car loan.
Not just FICO scores
When looking at an application from someone that’s obviously encountered problems with their credit, these subprime lenders look past the low credit scores and, using special scoring models that take into account additional factors, qualify an applicant for a credit tier that determines the interest rates that applicant qualifies for based on vehicle year and mileage.
These scoring models typically consider these criteria:
Ability
Can the applicant afford a car payment? These lenders first consider the applicants income. They then review that person’s monthly bills to calculate a debt ratio. Most subprime lenders want an applicant’s overall debts, including a car payment, not to exceed 40% to 50% of the total monthly income.
The lower this debt-to-income (DTI) ratio, the better an applicant will score.
High risk lenders also prefer a monthly car payment that’s less than 15% to 20% of the total monthly income. The lower this payment-to-income (PTI) ratio is the better an applicant will score.
Larger down payments also will improve the chances of an approval. Cash down reduces the loan to value (LTV) ratio, lowering a lender’s risk. The lower the LTV ratio is, the better an applicant will score.
Stability
Stability usually takes two things into consideration. The first is how long someone has been employed at the same company or in the same field. The second has to do with how long a person has lived at their current address or in the same general area.
In this instance, lenders look for a minimum of one year with the current employer with higher scores given for additional job time. Short job tenure can be offset by employment in the same industry or switching employers for more job experience or higher pay.
Residence stability – living for an extended period at the same address or in the same geographical area – also indicates financial stability. People who move frequently are considered by these lenders to be “skip hazards”. If a vehicle needs to be repossessed, lenders want to know that, if need be, they’ll be able to find it. The longer you’ve lived at your current residence, the better you’ll score. In addition, homeowners score higher than renters because it’s more difficult to move if you own the home you’re living in.
Willingness to pay
These lenders will check credit reports to review an applicant’s bill payment habits – especially for auto loans. If they find “slow pays”, they’ll check to see if this is a “situational” or “habitual” issue.
Late payments resulting from a single incident, such as a layoff or medical emergency are considered “situational” bad credit. Never paying anyone on time is deemed “habitual” bad credit. Needless to say, applicants with “situational” payment problems will score higher than those with habitual payment issues, since those with “situational” bad credit have exhibited previous responsible credit behavior.
As we see it
Subprime lenders take into account ability, stability and willingness to pay when determining the interest rates of high risk car loans. Since each lender considers these factors differently, the interest rate any particular applicant will qualify for can’t be answered beforehand.
One more thing: at Auto Credit Express we match applicants that have car credit problems with dealers that can give them their best chance at auto loan approvals.
So if you’re ready to reestablish your auto credit, you can begin now by filling out our online auto loans application.
Here’s why:
Interest rates with bad credit
To begin with, for people with good credit (normally considered to be a FICO score between 720 and 740 and above) traditional lenders can assign car loan interest rates based on their credit scores. This makes comparing lenders and rates easy.
Even applicants whose FICO scores fall between 640 and 700 sometimes qualify for credit score only-based rates.
But when FICO scores fall below 640, most traditional lenders will turn down the application. At this point, typically the only option is to apply for a high-risk car loan.
Not just FICO scores
When looking at an application from someone that’s obviously encountered problems with their credit, these subprime lenders look past the low credit scores and, using special scoring models that take into account additional factors, qualify an applicant for a credit tier that determines the interest rates that applicant qualifies for based on vehicle year and mileage.
These scoring models typically consider these criteria:
Ability
Can the applicant afford a car payment? These lenders first consider the applicants income. They then review that person’s monthly bills to calculate a debt ratio. Most subprime lenders want an applicant’s overall debts, including a car payment, not to exceed 40% to 50% of the total monthly income.
The lower this debt-to-income (DTI) ratio, the better an applicant will score.
High risk lenders also prefer a monthly car payment that’s less than 15% to 20% of the total monthly income. The lower this payment-to-income (PTI) ratio is the better an applicant will score.
Larger down payments also will improve the chances of an approval. Cash down reduces the loan to value (LTV) ratio, lowering a lender’s risk. The lower the LTV ratio is, the better an applicant will score.
Stability
Stability usually takes two things into consideration. The first is how long someone has been employed at the same company or in the same field. The second has to do with how long a person has lived at their current address or in the same general area.
In this instance, lenders look for a minimum of one year with the current employer with higher scores given for additional job time. Short job tenure can be offset by employment in the same industry or switching employers for more job experience or higher pay.
Residence stability – living for an extended period at the same address or in the same geographical area – also indicates financial stability. People who move frequently are considered by these lenders to be “skip hazards”. If a vehicle needs to be repossessed, lenders want to know that, if need be, they’ll be able to find it. The longer you’ve lived at your current residence, the better you’ll score. In addition, homeowners score higher than renters because it’s more difficult to move if you own the home you’re living in.
Willingness to pay
These lenders will check credit reports to review an applicant’s bill payment habits – especially for auto loans. If they find “slow pays”, they’ll check to see if this is a “situational” or “habitual” issue.
Late payments resulting from a single incident, such as a layoff or medical emergency are considered “situational” bad credit. Never paying anyone on time is deemed “habitual” bad credit. Needless to say, applicants with “situational” payment problems will score higher than those with habitual payment issues, since those with “situational” bad credit have exhibited previous responsible credit behavior.
As we see it
Subprime lenders take into account ability, stability and willingness to pay when determining the interest rates of high risk car loans. Since each lender considers these factors differently, the interest rate any particular applicant will qualify for can’t be answered beforehand.
One more thing: at Auto Credit Express we match applicants that have car credit problems with dealers that can give them their best chance at auto loan approvals.
So if you’re ready to reestablish your auto credit, you can begin now by filling out our online auto loans application.
