Getting an auto loan can be a fun or a not so fun experience if you are in need of bank loans. You go to the car lot, excited or with anxiety, wondering, “what auto am I going to drive off the lot?” Not everyone is sure if they can even afford the car or if they can get a loan. “Will I get approved?”
Imagine being the person giving you the loan. If you owned a bank using your own money to lend out, what kinds of things would you require the Lendee to provide to you for you to part with your hard earned money? Here is a list of the
“5 Cs” that many bank lenders look at before giving you an Auto loan.
Credit History- This is the list provided by the 3 major credit reporting agencies: Experian, Equifax, and TransUnion. On each report, it shows which lenders have given you credit loans and your history in paying the loans back.
If you don’t have credit cards or bank loans, copies of your history of rent or utility bill payments could help to establish your ability to pay. Also, you will have a FICO score from each reporting agency. FICO- Fair Isaac Corporation (USA), is a score given to grade your credit and starts at 300 and goes up to 850. The higher your FICO score, the better your credit is. A FICO score of 600 is good, 700 and above is better, and 800 or above is the best.
Capacity- This is your debt to income ratio. In other words, how much money is coming in a month, and how much money is going back out in bills and expenses. Will giving you a loan put you in a financial bind? There is a calculation that lenders use to figure this out based on your yearly income and monthly debt. It is a guide that lets the lender know if you will be able to pay back the loan.
Collateral- This example is specific to getting an approval for an Auto Loan. An auto loan is a secured loan. The collateral is the Auto being financed with the loan you in which you are applying. That means that if the agreed payments are not being paid on loan, the auto that was financed becomes the lending banks collateral to take back. The loan is secured by the collateral of the Auto. The banks will keep all previous payments. They can then re-sell the auto and recoup some of their loss from the failed bank loan.
Capital-Household income is the primary source lenders look at for your ability to pay back a loan. This helps the bank see that Other Capital includes 401ks, savings accounts, things of value that can help you get the money you need if you get in a bind or lose your job.
Conditions- This is the terms of the Loan. For example, Interest rate, length of the loan, monthly payment amount. Lenders will want to make sure you meet the conditions of the loan. If you are trying to purchase an Auto the amount loaned has to go to an Auto purchase. You may have to provide a Vin# from the vehicle of interest and proof of Insurance.
One rule of thumb, if you don’t have much credit history or collateral, consider having a good down payment for your bank loan. Approximately 10% looks good to a lender for a down payment, but 20% looks even better. So if the auto you are hoping to get is $10,000 you will want to have $1,000 to $2,000 to put down. If you currently have a vehicle that’s paid off, it can potentially work as a down payment. However, check the “trade” value on Kelly Blue Book to see if it could help lower your down payment.