Auto Loan Approval
There's More to a Yes
Than Just A Big Score!
A banks auto loan approval and their rates aren't quite as straightforward as you may think.
It's not simply, "Well Mr. and Mrs. Jones, you've got 750 FICO scores and you automatically qualify for our low 4.25% rate...Sign here. Have a nice day."
Auto lenders take a few things into consideration when assessing risk. Risk is what it's all about for auto lenders when determining their approvals and rates.
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Loan Structure
and Key Phrases
Some things lenders consider when determining an auto loan approval are:
- The age of the vehicle
- The mileage of the vehicle
- PTI ratio - payment to income %
- DTI ratio - debt to income %
- Term of the loan
- The loan structure - advance or loan to value
Lenders will loan a predetermined percentage of money against the value of a vehicle. Lenders use the following values to determine what percentage they will lend:
- Invoice (for new vehicles)
- Kelley Blue Book Wholesale (for used vehicles)
- NADA Trade Value (for used vehicles)
Some auto lenders (not nearly as many) will use:
- MSRP (for new vehicles)
- Kelley Blue Book Retail (for used vehicles)
- NADA Retail (for used vehicles)
Average
Loan to Value
Using the invoice of a new vehicle as an example, a lender, on average, would likely lend no more than 115% of invoice, plus tax, title, license and back end products (Vehicle Extended Warranty and GAP Insurance).
Lenders will loan more than this, but it will usually lead to an increase in your finance rate, because the "inline" loan structure has been exceeded.
Equity
Discounts, Plus
If you have a large down payment or a lot of equity in a trade in, then lenders will often give what is called an equity discount.
Lenders give these discounts, because a loan structure that is well under their "inline" requirements lessens their risk and potential for financial losses.
These equity discounts in combination with shorter term financing, a high FICO score and a newer, lower mileage vehicle will help you get the best rates available.
Older
Vehicles
Older vehicles and those with higher miles are going to cause lenders to:
- Call for a smaller advance and a tighter loan structure.
- Cut back on the term of the loan.
- Increase your finance rate.
This applies to both good and bad credit.
Can your bank beat these rates? Unlikely!
What Else
Auto Lenders Look At
The other items that auto lenders look at, are your PTI ratio, DTI ratio and your stability.
Payment
To Income (PTI)
PTI is simply the expected monthly payment of your new auto loan divided by your gross monthly income.
For good credit, lenders will like this figure to be no more than 20% to 25% and for bad credit, they like it to be closer to 12% to 15%.
Debt
To Income (DTI)
This ratio is your monthly out go divided by your gross monthly income.
For good credit, lenders like this figure to be no more than 50% to 55% and for bad credit, they would like it to be in the 35% to 40% range.
Term
of the Loan
The longer the term of the loan the higher the rate. The lender assumes more risk loaning money on an 84 month loan than they would on a shorter term like 48 or 60 months.
Congratulations! You made it through the not so eventful world of loan structure and now know how it ties into an auto loan approval. Now that you've mastered this it will make it much easier to understand how to get the best Bank Auto Loan Rates.
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