Use Your Poor Credit Score To Get Auto Financing – Here’s How

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Did you know that approximately 31% of Americans have a poor credit score? You’re not alone!

VantageScore (one of the biggest credit scoring models used in the United States) says there are about 220 million “scoreable” people in the US and 68 million of them have bad or poor scores (lower than 601).

Having a good credit score can get you access to auto loans and rates that are just not accessible to everyone. Well, the good news is that credit scores are “dynamic”. Meaning your credit score will increase on a monthly (sometimes weekly) basis as you make smart credit decisions.

So what auto financing is available to those with poor scores in the mean time??? I’m glad you asked – If you have a poor credit score, your advantage is in knowing the rules and options.

Let’s dig in –

Applying for Auto Financing:

pre-approval Vs. pre-qualified

When applying for auto financing, lenders make their decision based on only a hand-full of criteria.

  • Credit score
  • Credit report (detailed information found)
  • Debt-to-income ratio (DTI)
  • Loan-to-value ratio (LTV)

If you have a poor credit score, you might NOT want to apply for pre-approval auto financing.

Pre-Approval:

Pre-Approval auto loans are solely based upon your:

  1. Credit score
  2. Credit report

Whether you’re responding to a pre-approval letter you got in the mail, or you initiated the pre-approval with your local bank, the process begins with your score and report. For those pre-approval letters in the mail, the lender only has access to information found on your credit report. For those applying for pre-approval at the local bank, you will be asked for more information on your application, yet this application process is still different from a pre-qualified process.

Pre-Qualified:

Pre-qualifying for an auto loan is different from Pre-Approval in several ways. First, pre-qualifying means you take a trip to the dealership, find a car you like and apply for auto financing for that particular vehicle.

Having poor credit requires that you compensate by performing well on other underwriting criteria.

  1. Debt-to-income ratio (DTI)
  2. Loan-to-value ratio (LTV)

For people with poor credit scores, the risk factor goes up. So to compensate the lender will look closely at your income to determine your DTI ratio (Debt-to-income). In other words are you making enough money now to afford the new car payment. The lender will want to keep DTI below 15%. You calculate the ratio by dividing the monthly payment by your monthly net income.

When you’re strolling around the car dealership it’s important to determine if you are getting a good deal. The lender calls this LTV ratio (loan to value), and is the second criteria used to determine your pre-qualification. People with bad credit should keep the LTV as low as possible, or risk losing the deal.

This is the criteria, which only you control. Nobody knows the collateral value until you decide which car you want to buy.

Example of LTV ratio:

The vehicle is listed for $8,000, but the vehicles value is $10,000. The LTV ratio is 80% (8,000 / 10,000).

Keeping the LTV ratio low is important to the lender because this determines how likely they will get their money back in the event you fail to make your payments and the vehicle is repossessed. The better the deal you can get on the vehicle gives them less risk.

Summary

The way you use poor credit to get auto financing:

  • Apply for Pre-Qualified Auto Loan (not pre-approved)
  • Apply for smaller loan amount (keep the DTI low)
  • Find the best deal you can (keep the LTV low)

Happy hunting my friends!

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