More than 90% of the cars sold in the market are financed, and in fact even those with the means to buy a car in cash prefer to finance their cars due to the low interest rates and the incredible leverage currently available in the auto market in the U.S. While financing a car may seem attractive, it is an important financial decision that, if not done correctly, can hurt your financial situation much more than helping you. This is why we decided to develop a basic guide to understand what credit ratings and factors are necessary for you to buy your next luxury or exotic car.
In the world of dealers, credit is very different from the banking world. It is important to understand that dealers deal with automated guidelines and wholesalers instead of bankers, allowing them greater flexibility based on their relationships with certain wholesalers in certain banks. In other words, just because one distributor can not approve does not mean that another can not do it with the same bank.
So what do distributors and wholesalers look for and how does this process work?
Most dealers have their own financial applications on their websites or on paper which helps them evaluate their credit before submitting it to banks (using a tool called Dealertrack) that allows them to submit to several banks at the same time once Know your financial situation. Good dealers are strategic in their approach and only submit to one or two banks against inexperienced dealers who send it to all banks. A good dealer will know the guidelines of the banks they submit to, making it easy to know in advance what you will qualify for.
So what do banks look for?
Obviously, your credit score matters, and it has a lot of weight, but there is also the LTV in the car known as the value loan and your credit history (previously funded cars and their behavior).
The breakdown of your score is as follows:
720+ Level 1: You have leverage and qualify for the best rate. It is likely that you will receive the best rate and term on your car loan.
650 – 720 Level 2: You may still qualify for a loan, but the dealer can play hard to sell you a higher rate so they can earn more money.
600 – 650 Level 3: While you will not get a car based on your score alone, there is still hope; But expect to pay a premium on the fee given, and perhaps the restrictions on the terms too.
The second part of the equation is its LTV (Loan to Value). When you buy a car, banks will use the Black Book Value, normally aligned with NOTHING clean retail, to determine your liability and what your down payment should be. Banks are aware that dealers need to earn money on their sale; And therefore, it will allow LTV to raise up to 120% of the retail meaning clean if the value of a car is $ 100,000, most banks will allow the dealer to finance up to 120% of that number Is $ 120,000.
However, the closer the value of the loan (total financed) approaches to 120%, the higher the bank risk; Therefore, a higher down payment will be required if your credit score is not higher than 720. The higher your score, the more forgiving the bank is by allowing you to get out with less money and a higher LTV.
Those with bad credit will have to stay below 80% on LTV because banks want to limit the risks, and since dealerships do not usually cut prices low enough then you are required to make up the difference in cash.
The third and final piece of a bank seeks is its past history of financed cars and the total loan value of its previous cars. Banks do not like people without history and certainly do not like people who go from paying $ 200 to $ 1500. They often favor those who systematically go up in amounts rather than making big jumps.
While the amount that is approved for is normally based on your income, the bank also understands that when you pass $ 70K loans, it is not a matter of necessity but preference and therefore will limit that preference by allowing reasonable jumps to less Offset by a larger down payment.
Here are two scenarios for you to understand how this equation works from start to finish:
A) The perfect candidate would be someone with the 720+ credit account who buys a car valued below 100% of NADA's clean retail value and with a history of last cars within the margin of 40% of last cars Financed. This candidate qualifies for the best rate.
B) The bad candidate would be someone with an average or below average credit score trying to buy a car valued by a greedy seller and whose past history only shows cars around $ 15K but now wants to buy a $ 80K car . This guy is going to need a very large down payment and you are most likely to pay a high rate.
Video credits to Exotic Car Hacks YouTube channel