Kevin Scanlan is a car salesman in Henrietta, Texas, who would like to change car buying, one customer at a time.
Cars and Credit
Will My Credit Affect My Choice of Cars?
Absolutely. In both the obvious ways – no one is lending you $250,000 if you have bad credit and no way to pay it back. There are other less obvious ways your credit score can affect your choice of cars. Most people do not understand how this works. I will keep this simple and just touch on the high points, but you need to know these things if you have low to mid-range credit scores.
First off, if you have poor credit it is not the end of the world. By definition, half of the people in America have a credit rating that is less than average. Student loans, divorces, medical issues and all kinds of life events can pull down your credit score. What you want is to get a car. What you should know is how your credit score will affect your options. Understanding this before you get to a dealership will help you and your salesman.
When you come to a salesman remember that you know all the facts about your situation. The salesman has never met you and doesn’t know if you live under a bridge or just inherited a million dollars. You should be open and up front. Your credit score is what it is – feeling embarrassed or afraid to bring it up is not going to help you get into a new car. Working with a good salesperson – together – is the best way for a successful outcome.
What Do Lenders Look At?
How do the banks look at car loans? Most big lenders have a formula that is built into a computer program that simply looks at certain items on your credit report, does some quick math and makes a primary determination. It is looking for key things that must fit within their preset guidelines. If you do not meet the guidelines, someone will have to look at the credit application and make a determination to loan or not to loan and to set the interest rate.
What are the lenders looking for? There are three things that are key –
- They are looking at you. They want to know if you are a good risk. Everyone is a risk to some extent. The lender has to determine how much of a risk you are as a borrower and then they decide whether or not to lend and at what interest rate. The more risk you represent, the higher the interest rate. The best way to determine your risk is to look at your credit score. It is a well thought out set of algorithms that evaluates key financial issues and translates that to a simple number. I have another article on what the credit reporting agencies look at and how they handle the information (look for that here on Hub Pages).
- They are looking at your overall credit situation. Most of your credit situation is addressed in your credit score – BUT not everything. You may have average credit and yet have $2,000,000 in the bank. Your credit score will not show that. Maybe you have very little credit reporting because you pay cash for everything. Specific things must be looked at when the credit reporting does not accurately address your risk as a borrower. They look at how much debt you have overall and how that relates to your income or ability to repay the loan.
- They are looking at the car or truck you are looking to buy. From a lender’s perspective the car you are buying is their security net, should you default. The lower your credit score, the higher the risk to a lender. That means the lower your credit score, the more important the vehicle is in addressing the specifics of the loan.
A Tale of Two Trucks...
Now, let’s look at some real-world examples. Let’s say you have below average credit. Just randomly, let’s say your credit is 585, which in banking terms is considered sub-prime. How does that 585 affect your car choice?
As I said in the beginning, you are not likely getting a loan on a $200,000 Porsche with a 585 credit rating. Chances are, though, that if you have a 585 credit rating that was not what you were looking to buy. Chances are you need a truck, SUV or family car. For the purposes of this article I am going to ignore over-buying. I am just going to look at issues with cars that are within a reasonable price range. Here are a few cars and how a lender might look at them with you as a borrower:
Example One: 2005 Ford F-150 – Gorgeous truck, owned by a little old lady that only drove to church on Sundays. Although it is 14 years old, it has only 60,000 miles, was maintained at the dealership and looks as good as the day it left the showroom. The truck shows to have an average retail of about $9,800. Since it is the cleanest truck in Texas, the dealer wants $11,000 for it. It is a great deal, even at that price because of the low miles and great condition. You offer $10,500 and the dealer accepts. Now let’s look at it from the bank’s perspective.
The lender cannot see the vehicle. He does not know that it is awesome. He sees the low miles, but that is it. If it had to be repossessed what is the truck’s value going to be? It maybe in perfect condition now, but what if you mess it up and trash it out. That means the main reason it is so high in price is a conditional aspect that could be completely gone one year down the road. Also, it is a 14 year old truck. Its trade-in value is low. The bank has to look at the truck as an asset they might have to sell quickly. They are not car dealers, they are banks. They will loan based on the trade-in value, or a number close to it. The trade-in value on that truck is about $7,000. That means the bank either has to loan well above its value as collateral, or you have to come up with $3,500 for a down payment.
Example Two: 2015 Ford F-150 – nice truck, but nothing special. It seems to be in good shape and has above average mileage. The truck is listed for $22,000 and the dealer will sell it to you for $20,500. It seems like a good deal, but it is exactly $10,000 more than the older truck.
In this case the lender sees a truck that is $10,000 more than the other truck and it is not in nearly as nice a condition. BUT, it is only 4 years old, not 14 years old. Its trade-in value is around $17,000.
Let’s assume the bank says, “yes” on truck number two. Why? They have to loan $10,000 more, isn’t that a much bigger risk? Not necessarily. Remember that if you make all your payments, then the collateral never enters into the picture. If the bank were to loan both purchases completely, with no money down, what would their risk be? Both trucks have the same risk in that the trade-in value on each is about $2500 to $3000 below the sales price. However, the 2015 is much better collateral as it is common, easy to sell quick, and its value is based on its model year not its condition – which can deteriorate.
So, there are lots of issues when looking at a car purchase with average to below average credit. Cars that are older or have higher miles are hard to get financed. If you do get financed you can be assured that you will pay a higher interest rate and will not be able to get as long a term to pay off the loan.
New cars often have programs that will help customers get financed. I know what you are thinking. “I can barely afford a used car - how can I get a new one?” A lot of it has to do with the risk. A new car is good collateral. Also, with a new car, the lender might be willing to lend for a longer period of time. If the used car is 4 years old, they are not going to want to loan much beyond 36 or 48 months. On a new car, that might be 60 or 72 months. That makes a huge difference in two ways. First, it lowers your monthly payment. Secondly, that lower payment might be the key to having you make your payments on time. The loan is longer, but you are less likely to default.
- Be open with your sales person. Tell them up front what your situation is. Let him use his expertise to help guide your vehicle selection. Remember, he does this every day for a living. He is more familiar with what will or will not get financed. Maybe he has already had a customer looking at the same car you are – he just might know exactly what the banks are willing to lend on that car.
- Be open to suggestions. I know that you had your heart set on a certain car, but if it can’t be financed, then it is just going to cause stress. Now, I do not mean get lead around the lot by a pushy salesperson. Not at all!! It is your car decision. You are making the payments and it has to be the right car for you. Do not buy a car you do not feel good about. If, however, you feel like you have a good salesperson that understands your situation – and sincerely seems to want to help – at least be open to his ideas.
- Remember your credit situation. I mean this in two ways. As you are trying to get the car of your dreams, remember your situation. Be realistic! Also, think ahead. Will this car decision likely help improve your credit situation? Will it be easier next time? Or are you just making things worse with a huge note that will put you in debt for 4 or 5 years?
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.