BUYING A CAR WITH "SO-SO" CREDIT

How Banks View Car Loan Applications

First and foremost, we hope you and your families are healthy and safe. As we approach what seems like the “downhill side” of the COVID-19 pandemic, many of you, other family members and/or friends may have had their life, job, income, etc. all disrupted.

For this newsletter, I wanted to dedicate some time explaining how several, if not most banks and lenders view the auto loan proposals that we send to them.

To start, it’s safe to say there’s usually an auto loan to be obtained for most people regardless of their situation. I say “most people” because, sure, it’s difficult in the lending world to make rules that apply to all without stipulations. Let’s look at how a lender might view a loan request if you’ve had disruptions that have resulted in a few late payments.

Disclaimer: “Currently past due” and “past due but current” are TWO TOTALLY DIFFERENT things. This first means you are past due now and you owe someone. The second, past due but current means you still owe someone, but you’ve caught up and are current with your payments. You do not want to be “currently past due” with a lender while applying for another loan.

New car vs. pre-owned: We see this all the time. We’ll have a 10-year-old well-maintained SUV with 125,000 miles for sale. That SUV may be large enough to accommodate a family and priced at $15,000 it becomes attractive to many buyers thinking, “it’s large enough for our family and affordable”.

Here’s the problem. Due to that vehicle’s age and mileage, it requires the lenders to most likely shorten the loan term and charge a higher rate because of their risk factor is simply higher. The payment on that vehicle may be the same or even higher than that same vehicle new, priced at $30,000 or even higher.

Lenders tell us all the time to “switch the customer to a new car and we’ll re-visit the application”. Why? Because it minimizes their risk. If you have “x” amount of money to budget each month for a car payment and that’s it, how are you going to pay for a $2,000 repair if it comes up? Lenders know this. They would rather finance you in a newer vehicle with a warranty that will cover repair costs.

Sure, credit scores, debt to income ratio, time at residence, etc. all play a factor, but the more stability the easier it is to obtain a loan. It is not 100% necessary for all of those items to be perfect and in line though. Lenders are fully aware of things that happen to people’s lives (like this pandemic) but seem to be aggressive nonetheless and attempt to find ways to approve loans. Contrary to popular belief, lenders WANT your loan and try hard to find ways to get your business. Therefore, they do make suggestions as to what type or what cost of a vehicle to put you in, so it fits not only your needs but their loan parameters.

Quick example. We were advertising and selling an SUV similar to the one I described above and were surprised by how many people it attracted. One thing we learned from all of those customers is that they all thought what I just described (It’s used and old so that’s all I can afford). For many of them, the banks replied with a shorter term and a higher interest rate as predicted, so we offered to show them something newer and different. I cannot tell you how many cars that one SUV sold for us (thanks to the lender recommendations) and it was by accident. One customer even switched to a new 4-door Volkswagen Passat. Their entire family fit into the car with room to spare. Turns out, they did not necessarily need an SUV, what they needed was more space which is what they got. They ended up with a new car, a fresh warranty, a lower interest rate, and a cheaper payment. They were totally surprised and extremely excited as they had never purchased a new car before.

I hope this helps ease your mind if you’re in the market for a new or used car and have had some life disruptions in the past. No worries, we’re here to help and so are the lenders. Let us have the opportunity to find the right vehicle that fits your budget, needs, and lending requirements and we’ll do everything we can to exceed your goals with your next auto purchase.

Happy Motoring,

John Chauvin, General Manager
Hewlett Volkswagen, LP