A lender’s decision on your auto loan application is chiefly based on your creditworthiness. But how do they assess creditworthiness? There are certain factors they look at. We discussed some of those factors below.
In your credit report, there’s a section called Payment History or Account History. This is basically a record of your credit accounts, their statuses, and other important details about them. From here, lenders can see which accounts are delinquent and which are current.
Basically, what lenders want to see in your payment history are timely payments. Late payments are considered as negative information in your credit report and decrease your creditworthiness. Lenders don’t want to see this or they would think that you’ll likely behave the same in your auto loan.
Quick tip: Did you know that the headquarters of one of the major credit bureaus in the country, Equifax, is located right here in Atlanta, GA?
The LTV or loan-to-value ratio compares the total loan amount you owe and the value of the asset that is, the car. (Remember that your car stands as the collateral.) The higher your LTV, the higher the risk for lenders. Your LTV should not exceed 150% in order to get easily approved for an auto loan. But even if you go beyond this safe zone, some lenders can still accept you into their auto loan program. However, the auto loan is more likely to be more costly.
Too much credit applications are a red flag for lenders. How do they know whether you’ve had too much credit applications already? The number of credit inquiries recorded in your credit report tells them.
All credit inquiries—the ones initiated by you and the ones initiated by potential creditors and employers—are there in your credit report. What affects your creditworthiness more are the inquiries you made when you were applying for credit, insurance and loan.
Quick tip: Some credit-reporting agencies indicate the purpose for which a company requested your information.
DTI and PTI
Two more ratios that lenders look at are your DTI and PTI or debt-to-income and payment-to-income, respectively. The DTI is monthly expenses over monthly income. Lenders look at this to determine if you can still take on an auto loan or another debt.
Meanwhile, the PTI, which is more common in bad credit lending, compares your combined car and insurance payments to your monthly income. According to Moorad Choudhry in his book The Principles of Banking, a higher PTI means you need to set aside more money from your income to meet the other end of the comparison.
The preferred maximum DTI and PTI differ from lender to lender.
Income and Employment
When it comes to your income and employment, lenders want to see stability. A stable job implies that you are less likely to be laid off any time soon. This makes them more confident that the loan will be paid off on time. Make sure to provide the appropriate documents as proofs of your income and employment.
This is how important your credit is when applying for an auto loan. Lenders use these factors not only to evaluate your creditworthiness but also to measure lending risk. Make sure you’ll get approved for an auto loan easily by examining your credit before filing your application.