Vehicle Loans Are Risky Business
Lenders base their initial approval, condition or turn-down of your deal based on their lending guidelines. There are three constants that every lender considers when deciding to offer credit to your customer. They are: Character, Capacity and Collateral
Character is payment history, Capacity is debt to income and payment to income ratios, and Collateral determines the advance terms based on factors such as the age of the unit and loan to value ratio.
The lender is determining risk based on how the deal was submitted.
The most important factors to a lender are Character which is payment history and Capacity which is debt to income ratio and payment to income ratio. These two factors alone determine about 65% of the decision. Can they afford the payment? Will they make the payment on time?
Character – If there are late payment issues or a period of slow pay in your customer’s credit report, be prepared to talk to your lender about it. They will want to know - Why it happened, what they did to correct it, and why it won’t happen again.
Many things can cause a period of slow pay such as illness, employment gaps, pandemics and so on. Get the details and provide the information they will need to justify the additional risk you are asking them to take to approve your deal.
Capacity – Debt to income and payment to income. Most lenders will want to see current debt no more than 40-45% of monthly income, with a car payment of around 18% of the monthly income. Before you call back the lender, do the math. If DTI is an issue, verify balances on their report. Maybe they just paid off that high credit card balance and it isn’t showing yet?
Collateral - Usually, you can negotiate a better approval by getting more down payment or looking for more equity from a trade. If not available, you may have to change to a vehicle that has a better LTV ratio thus lessening the risk to the lender to gain an approval.
If you want to get those tougher deals approved, start thinking like a lender. Think risk.