Recent economic events have caused the financial sector to change the qualifying guidelines for traditional auto loans. Consumers have fallen out of the prime lending guidelines, which has increased the demand for sub-prime auto loans. Some consumers do not realize that the rules have changed until they arrive at the dealership and attempt to buy a car.
Dealers know that auto financing is required to finalize most vehicle purchases. Without access to many different credit sources, the dealership would never sell a car. Borrowers with less-than-perfect credit should realize that tighter lending rules call for creativity, not surrender.
POSSIBLE, BUT NOT EASY
Financial activity is tracked for every consumer through the three credit bureaus. High credit scores are considered favorable because they reveal the individual’s actual repayment record in various credit classes. Lenders use the credit score to determine the risk of non-payment of a loan. Borrowers with poor credit scores will have to find auto loans through non-conventional sources because banks offer only prime auto loans.
- Dealer loans – Large dealers can act as the direct lender for car buyers under various credit situations. All loan payments are sent to the dealer directly. This option is the most difficult type of loan of these three options. Few dealers will underwrite subprime loans because the funds are tied up for longer periods.
- Third-party loans – Sub-prime lenders offer auto loans through car dealerships. The car buyer makes loan payments to the third party. Well-defined loan programs have specific interest rates that are higher than prime rates because of the perceived risk of nonpayment. Borrowers who fail to pass the qualifying criteria, such as length of employment and monthly income, will not be approved for the loan.
- Co-signed loans – Enlisting the help of a cosigner who would qualify for the loan is another way to secure auto financing. An individual who signs the loan papers as the cosigner is legally bound to repay the loan if the borrower defaults. A friend or family member might be willing to act as the cosigner under certain circumstances.
MORE EXPENSIVE CREDIT
Consumers with poor credit scores receive many postcards and advertisements with promises for a loan under any circumstances. These lures are intended to bring the person into the showroom. Fewer than ten percent of all recipients will qualify for these programs.
- New car – Obviously, new cars have higher prices than a used car. The borrower’s income can limit the size of the loan that is approved through any lender. Sub-prime auto loans are possible for new cars if the borrower meets income and employment requirements.
- Pre-owned vehicle – Affordable loan payments are important for any car buyer. Lower car prices can make a subprime auto loan possible for the borrower with less-than-perfect credit. An experienced car salesperson will inquire of the lender prior to finding a car on the lot with the shopper.
Lending criteria applies to every loan application including home loans, credit cards and auto loans. This reality should cause consumers to protect the credit history with diligence. Access to credit can make the difference between achieving one’s dreams and being a frustrated dreamer. There is hope for those who want to find loans with ease.
WAIT TO PURCHASE
Credit bureaus never record the demographics of consumers. Race, gender and religious affiliation are not recorded on the credit profile. Every credit score is based on the activities embraced in the marketplace by each consumer. Lenders are not able to discriminate based on the borrower’s personal characteristics.
Objective criteria have been set forth to determine the borrower’s record with credit. Paying bills on time indicates responsible behavior in credit situations. Many years of paying bills on time can be wiped out if the consumer loses the primary source of income and fails to make payments.
New borrowers will have better luck with qualifying for a loan that those with poor credit. The non-existent credit history is considered a blank slate on which to build a positive record.
Different types of credit, such as credit cards, traditional loans and auto loans, strengthen the credit history. Handling each type of credit appropriately demonstrates proper handling of credit limits and repayment strategies. Early repayment of each obligation assures lenders that a loan will be repaid.
The consumer with significant numbers of negative entries on the credit report should begin to embrace these habits. Nearly every negative mark on a credit report can be traced back to an actual event. Invalid entries on the credit report can be disputed through the right credit bureau. Disputes against inconvenient, but valid, entries will not be fruitful.
On-time payments, appropriate debt ratios and responsible handling of all financial decisions will improve the credit score over time. The auto purchase can be postponed until the consumer can improve the credit score and history.
Refusal of an auto loan can be the catalyst for the consumer to make changes in financial dealings. Subprime auto loans have different qualifying requirements, but the lender still wants to receive on-time payments throughout the loan term. Borrowers will not find an auto loan without having to complete an application with important information.