So, when you are going to apply for an auto loan to purchase a car, creditworthiness is one of the most important criteria that lenders look at. Auto lenders, comprising of banks, credit unions, and auto dealers, need proof that the borrowers have a reasonable credit history and repayment capacity. Lenders also employ credit scoring tools such as the FICO score or any other score that is used to evaluate credit risk.
Auto financial institutions or car dealerships employ a FICO Auto Score, which is an industry-specific FICO score designed for auto lending and leasing. The FICO Auto Score model is from 250 to 900, while higher figures are associated with a lower risk of credit. Other FICO scores that may be used are: Other FICO scores that may be used are:
- FICO 8 – The current and most popular version of the FICO score, with the range from 300 to 850.
- FICO 9 – A newer FICO score variety that incorporates non-traditional data and has a less stringent approach to medical debts.
Thus when you apply for an auto loan at a dealership to buy a car, the lender is likely to use one of these FICO scores to assess your credit risk level. Lenders may also refer to other credit scores such as the VantageScore in some circumstances. However, FICO scores, especially FICO Auto Score are typically the most utilized in auto lending decisions.
The following are the reasons why auto lenders use FICO scores
Credit scores are the benchmark that auto lenders rely on to assess the risk of a borrower becoming significantly behind or indeed defaulting on an auto loan. Auto lenders favor FICO scores because Auto lenders favor FICO scores because:
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FICO has been providing consumer credit scoring services for more than three decades. Their models have shown to be very capable of signifying whether borrowers are credit-worthy or not.
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The scores take into account numerous credit data that are certain to depict every credit-worthy person.
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The scores condense a massive amount of credit data into a single three-digit figure that can be readily understood by the lending institutions.
FICO is continuously updating its scoring models because of the shift in consumers’ behavior and their credit usage.
Auto lenders would like to correctly measure credit risk before providing an auto loan, which is collateralized by the car. They use FICO scores to effectively make sound decisions on lending.
What FICO Ranges do most Car dealerships accept?
A credit score does not mean the same thing to everyone; each car dealership has a credit score that it uses to approve financing. But many have basic thresholds based on general FICO score categories: But many have basic thresholds based on general FICO score categories:
- While prime borrowers have FICO scores above 660. Many dealerships provide their preferred loan terms and interest rates to customers in this credit category.
- Subprime borrowers thus lie within the credit score of 600 and 659 on the FICO scale. Banks may give their approval for financing but at a higher interest rate.
The deep subprime borrowers are those with FICO scores of less than 600. Some car dealers offer loans to borrowers in this tier but at very expensive rates, with huge down payments, short loan durations, and high monthly payments.
Although these score ranges give a general idea, other characteristics such as your income, the amount of the existing debts, and the down payment also define the loan terms. For instance, a prime borrower with a 700 FICO score and a lot of current debt on other auto loans will be given a higher interest rate.
In what other ways do car dealers evaluate loan applicants?
Along with checking your credit score, car dealers gather other information to evaluate loan applications: Along with checking your credit score, car dealers gather other information to evaluate loan applications:
- Proof of income to ensure that you are capable of dealing with monthly installments. Dealers may require applicants to produce pay slips for the last few month's tax returns, and bank statements.
- Previous employers to establish employment history in other to evaluate the stability of one. Tenure at your job is sometimes considered while making the lending decision.
- An example of the credit worthiness is the down payment which gives a hint of how willing one is to complete the payments for the loan obtained. Large down payments also reduce the financed amount and therefore reduce the overall credit risk.
- Credit card balances and other outstanding debts provide a more accurate view of your monthly cash usage and how much you can spare for car payments.
The relation of the financed amount to the asset value of the car you want to purchase, which is the collateral value of the car.
Adding up all this information together with your credit scores provides car dealers with comprehensive details regarding your financial status to make the right auto lending decisions. However, your credit score is just one component of the overall equation, meaning that lenders derive their funding terms from a detailed analysis of your profile.
How to Verify the Credit Scores Auto Lenders Pull
Since FICO Auto Scores influence approval for desirable auto financing terms, it is wise to check the score before approaching the auto dealers. Besides the FICO Auto Score, members of myFICO get access to credit scores from the three major credit bureaus Experian Auto Score, TransUnion Auto Score, and Equifax Auto Score. The three-bureau FICO package provides a thorough view of your credit risk as perceived by lenders.
Checking your credit scores regularly gives you a chance to notice any discrepancies or issues with credit that you can correct before filling out an auto loan application. The best possible credit score provides one with the opportunity to qualify for the prime lending rates to help him or her finance the next car at better terms.
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