Credit is Life
No truer words can be said when you think about it. Credit is life. They do not teach this stuff in school. MYWayAutoLoan is here to help. Your life is the picture you have laid before it. The good news is you can change the picture. The best way to improve your credit rating is to make all your payments on time, every time. By establishing a track record of on-time payments, you can build a positive recent credit history. This can help you obtain new credit even before older negative information cycles off your report. Lenders are concerned with your recent payment habits. We offer free credit consultation to all our clients, feel free to reach out for yours today!
What is debt-to-income ratio?
The debt-to-income ratio is the amount of total monthly payments on your credit divided by your gross monthly income. For example, let us say the only bills you have are rent: $570.00 per month, one credit card: $30.00 per month, and one car loan: $300.00 per month. Add them up, and they equal $900.00 per month in debt payments that must be made. Now let’s say your gross monthly income (gross is before taxes are taken out) is $2500.00. To figure out your debt-to-income ratio, you take 900 and divide it by 2500,
and you get a 36 percent debt-to-income ratio. You do not want to overextend yourself. You can be sure that a lender uses this formula every time they look at giving you credit. As you take on new debt, be sure to keep your debt- to-income ratio below 40 percent if possible, and do not let it get to 50 percent.
Is cosigning good or bad?
Cosigning a loan is more than just a question of whether you trust the person for whom you are cosigning. The first question you need to ask yourself is, what is the monthly payment and what does it bring my debt-to-income ratio up to? Here is an example: A man with bad credit has his mother cosign for a loan on a truck. The $400.00 payment counts against her debt-to-income ratio. When she goes to refinance her house, a lender does not care who is making the payment; if it shows up on her credit report, she owns the debt until it’s paid in full. And this goes against her debt-to-income ratio.
It is okay if you cosign for a friend or relative; everyone needs help from time to time. Just remember, your credit rating must come first. If your debt- to-income ratio is adversely affected by cosigning, you may want to rethink it.
How long does it take to rebuild my credit?
Everyone’s credit history is different. Some credit histories may take longer to fix than others. However, major lenders like to see at least 24 months and even up to 36 months of recent paid-as-agreed history. It is important that you stay in the habit of making your payments on time every time because each time you are late, it sets you back. Remember, as you move ahead to rebuild your credit, be a person of integrity who holds yourself accountable.
This is the key to long-term success and happiness. Although some lenders like to see 24 to 36 months history in your credit file, that does not mean they will not consider you for a loan. Just having the technical tools to rebuild your credit is not enough. You need the inner tools of integrity and accountability if you are serious about having good credit that will last a lifetime. Your credit is you; it is that simple. Enjoy each small step along the way, and you will be amazed at how quickly your credit will be rebuilt.
Be prepared
The automobile installment loan is one of the fastest ways to rebuild your credit, provided the lender reports to the credit bureau and you make your payments on time every time. If you have the need for a newer, more reliable automobile, wait no longer. Here is how it is done. Remember, if you do not make your payments on time, you will damage your credit further. Make sure you are financially able to handle the debt load you incur from here on out. Never make a purchase unless you fully calculate the payment into your monthly budget. Being prepared is paramount to getting your loan.
My hope is that you will learn from the following information, thereby arming yourself with the knowledge you need to be approved for your automobile loan the first time you apply. (Most of the following information can also be used for all loans in general.)
What does a lender look for when approving a loan?
There are three things that a lender looks for when making a lending decision: STABILITY, ABILITY, AND INTENT. Think of these things as a three-legged stool. If one of the legs is missing, it just does not work. Before you get your automobile loan, you will need to have all three, or you will, most likely, not get approved.
STABILITY
Stability is important to a lender because if you are not stable in your life, you are less likely to make your payments on time. How long have you been at your current job? If you recently changed jobs, did you move up the ladder in pay, or was it a lateral move? How long have you been in the same occupation—one month or five years? If you change jobs but stay in the same occupation, a lender will consider that a positive when they look at how stable you are. How do you get paid? Can you prove your income? A lender likes to be able to prove your income. Recent pay stubs are great and very effective. If you get paid in cash or by personal check from your employer, make a copy of every single paycheck before you cash them. Having copies can prove income to a lender, and it may be the difference in getting approved. Are you self-employed? This is a hard one for small business owners. Keep good records. Be prepared to have the last two years tax returns and three months bank statements showing a positive ending balance; this is handy in helping to prove your income. In many cases, people who are self-employed can get approved with recent bank statements. Do you move around a lot? Moving a lot and not staying in one place for at least one year will hurt you considerably. Find a place to live and stay put for as long as possible. How long have you been in the same area? Being in the same area for a long time helps; moving from state to state frequently can hurt. Are you on a lease, or are you just paying a friend to live in his basement? Being on a lease helps tie you down to at least a six-month to one-year commitment; lenders like to see that you are responsible enough to have a lease in your name. This is not always a deal killer but is an important component to stability. Do you have a phone bill in your name? Having a bill in your name helps establish stability and ties you to a specific address. Do you have a bank account? Having a bank account tied to your current address is important, a checking or savings account will work.
ABILITY
Ability is equally important. You may be stable, but if you are not able, forget about being approved for a loan. Remember the debt-to-income ratio? It is where ability comes into play. If you have a high debt-to-income ratio, like 40 percent to 50 percent, it will be harder for you to get approved. A large down payment will help if it brings your monthly payment down to make a difference in your debt-to-income ratio. If it is more than 50 percent, forget about applying for an automobile loan until you have paid it down, have increased your monthly income or have a very large down payment. Remember, part of your ability to pay is being able to prove your income. If you have the income but cannot prove it, you will have trouble getting a loan.
INTENT
Intent is the third leg in the three-legged stool. This is when the approval process becomes a little subjective. Most lenders never get to meet you in person. If they do not meet you, they must read your credit report carefully and make an educated decision based on what they can see about you and your recent activity. Just to tell the dealer that your intentions are good will not be enough. You will need to have something in the other two areas (stability and ability) to back you up. Some smaller lenders will interview you in person, which will give you a better chance of getting approved for your automobile loan.)
Types of automobile lenders
There are three types of automobile lenders: prime, subprime, and Buy Here, Pay Here. Each one has a different set of criteria for approving a loan. Prime lenders deal in “A” credit only. If your credit is in the process of being rebuilt, you are not a candidate for this type of loan right now. A prime lender lends based on excellent credit. The risk for the lender must be equal to the rate of return. When you have excellent credit, a prime lender can offer lower interest rates because the likelihood of the loan going bad is very small. Subprime lenders are in the business of lending to people
who have had some bad credit (bumps in the road) in their past but now have recent positive credit in their credit file. Expect to pay a higher interest rate with a subprime lender, but this is only temporary. Remember, it is not all about the vehicle or the interest rate; it is about rebuilding your credit as well. Once your credit is rebuilt, you can enjoy the advantages of a lower interest rate by being approved by a prime lender. Before you apply for an automobile loan, make sure that the lender reports to the credit bureau. Your timely payments will be worthless towards rebuilding your credit if you make the mistake of buying a car from a dealer that does not report to the credit bureau. Buy Here, Pay Here dealers have been around since the first car came off the assembly line. They specialize in helping people get an automobile loan that otherwise would not be approved by a prime or subprime lender. It is always better to get a loan through a major lender. Sometimes a Buy Here, Pay Here is the only way to go to help get you back on your feet.
What will I be approved for?
Your first concern should be getting yourself in a position to get a loan. The kind of purchase you are going to make depends on all the factors we have discussed, such as stability, ability, intent, and down payment. Next, if it is a car you are purchasing, look for one that does not sacrifice your ability to make your payments, one that you feel good about driving, and one that will help you rebuild your credit. Cars come, and cars go, but your credit is for a lifetime. Do not be so concerned about having the car you have always wanted. Do be concerned about getting a loan for a reliable vehicle that you are able to make your payments on for at least
18 to 36 months. By making 18 to 36 on-time, monthly payments, you are showing a lender you are credible. Some people think that paying a loan off early is good, and in cases where there is already good credit, that is true. In this case, rebuilding your credit, getting a loan, and keeping it for at least 18 to 36 months is extremely important to rebuilding your credit. If the term of your loan is 36 to 72 months, go ahead and pay more than the minimum monthly payment if you can. This reduces the amount of interest you pay over the life of the loan and shortens the term. But remember not to pay it off too fast; you want to have a history of at least 18 to 36 months minimum. If you take care of this loan, you will have the luxury of being a little pickier on the next car you buy. You, in your lifetime, will have several vehicles, but your credit is you. That is what we are talking about here. Make sure to ask your dealer about their warranty program. If you can get a warranty, do not worry so much about the miles on the vehicle. Your main concern should be whether the warranty company is reputable and how the warranty claims service works. Also, be sure that roadside assistance is included in the warranty. If you do not have at least a 30 percent down payment, ask for GAP insurance to be included in your payment as well; this will help ensure that your loan will be paid in full in case your car is totaled, and the payoff exceeds the value your insurance carrier is willing to pay. Remember, cars are just a depreciating liability and not a good investment. Generally, they will never be worth more than what you paid for them. In fact, they go down in value, so do not get hung up about the color or the type of sound system. You are rebuilding your credit, and that is where your focus should be. Be practical now so that you can be picky later.
Don’t set yourself up to fail
The last thing you want to do is get a loan and then not have the ability to make your payments on time. So, do not agree to terms you are uncomfortable with, such as a high payment. If you budgeted for a $300.00 payment and they are showing you a car that takes $400.00, do not buy it. Ask to look at something you can afford. Do not let pride get in your way. Remember, repair your credit and fix your life. Remember, it is about your future credit and the car. Do not let your ego get in the way when it comes to closing the deal and signing the final paperwork. Make sure you feel comfortable, and do not be afraid to ask questions. There are no dumb questions.
How much down payment will I need?
As far as the down payment goes, all lenders are different, but one thing is for sure: the more money you have down upfront, the easier it will be to get approved. Keep in mind that the greater your down payment, the greater your selection when it comes to choosing your new automobile.
Payment, price and interest rate
The size of the monthly payment, along with a couple of other factors, can greatly impact the performance of the loan. As a rule, the typical subprime lender or Buy Here, Pay Here dealer looks at one thing when it comes to payment, and you should, too. Generally, the higher your payment, the shorter the loan, and the shorter the loan, the faster it will be paid in full. So, you want to pay as high a payment as you can without sacrificing your ability to make your payment on time, every time it is due. Will the car tote the note?
What that means is will the car run well for the term of the loan? The price of the car should reflect no more than 125 percent of the retail blue book. There are no two cars alike. The blue book is a general guide, an extra clean car will be higher priced, and a less clean car should be priced a little lower. Do not be afraid to ask for a discount. If you do not ask, you will surely not receive. Even though you want value for your buck, right now, the true value is in rebuilding your credit. So, be aware of how the car is priced, but do not let it be a deal killer. Interest rate is the same thing as price. The risk for the lender must be commensurate with the rate of return. So, be prepared to pay the maximum interest rate allowed in the state where you live. Remember that you are in the process of rebuilding your credit, so do not get hung up on the interest rate. In fact, on top of a high interest rate passed on to the consumer, most subprime lenders pass an acquisition fee on to the selling dealer before they will accept the proposed loan. This money goes into a risk pool of all their subprime loans. This helps to mitigate the risk that a higher interest rate will not cover the debt if the loan goes bad. This allows the lender to buy deeper, more risky buyers. For example, let us say the price of the car is $10,000.00 and the lender’s acquisition fee is $1000.00; the dealer must be able to accept a $9,000.00 net check and still show a reasonable profit to justify selling the car. Acquisition fees vary and depend on the assessed risk and how the lender scores the customer, collateral, and all-around structure of the deal. AS EINSTEIN SAID, “COMPOUND INTEREST IS THE 8TH WONDER OF THE WORLD. HE WHO UNDERSTANDS IT, EARNS IT AND HE WHO DOESN’T PAYS IT.” So, regardless of the interest rate, pay more than your minimum payment each month if you can, and your effective interest rate and term of the loan will decrease accordingly. Now, that is using the lender’s money in a positive way. In a nutshell, interest is just a number that can be decreased by accelerating the loan’s repayment by paying a bit more each month toward principal. You do not have to understand it, just do it, and you will be pleasantly surprised at how fast your loan will be paid off. I liken interest rates to a person who gets a DWI. How high do you think their insurance rates will be if they can even get insured? The rate must be equal to the insurance company’s risk to take a chance on insuring that person given their past driving record. The same goes for a lender to lend out their money.
How do I figure out my income?
Do not sell yourself short when it comes to your income. Always use your gross monthly income when applying for credit. This may be a little confusing, so I will explain it. There are two definitions used when it comes to referring to your income: gross and net. Gross is your income before any deductions are taken out, and the net is just the opposite. It is your income after taxes, and everything else is taken out. Lenders always use the gross income to figure out your debt-to-income ratio. Use gross income every time.
Always put your gross monthly income in the income box on the application. Again, gross monthly income means the amount of your check before they take out taxes. Here is how to figure your gross income: multiply your hourly rate by the number of hours you work per week, multiply that number by the number of weeks you work in a year. Divide that by twelve months in the year. This equals your gross monthly income. Example: $10.00 per hour x 40 hours per week = $400.00 x 52 weeks in the year = $20,800.00 divided by 12 months in the year = $1,733.00 this would be your gross monthly income. If you get overtime, put that in the box labeled other income unless you get overtime all the time on your check.
How do I figure out my rent / mortgage payment? I
If your rent payment is $1200.00 per month and you are the only one on the lease, you are responsible for the whole amount. If you have someone else on the lease with you, you are responsible for only half of the $1200.00, which is $600.00. The same goes for a mortgage payment. If you are married and you are the only one buying the car, you are only responsible for half of the mortgage payment if your spouse works. So, put only half of it on the application. Some people think that the higher the rent they can put down on the application, the more responsible they will look to a lender. This is not so. In fact, the higher your rent or mortgage payment, the harder it is to get APPROVED. Remember DTI (debt to-income ratios).
The big three
The big three on the application are income, residence time, and job time. As we just learned, using your gross income on the application is important. The other two are equally important to get approval on your loan. Residence time must show at least two years. If you have been at your current residence for less than two years, make sure you include your previous address. The same goes for your job time. There is a section for your current job information and a previous employer section on the application, so you can get up to at least two years of job time as well.
The big three help establish the three main points a lender looks for when approving a loan: stability, ability, and intent? Do not short cut here because when it’s time to get approved for your automobile loan, you’ll be happy that you didn’t.
Why the pre-approval is important
You would not go house shopping without consulting a mortgage broker to see if you qualify and how much you qualify for, right? Of course not. What amazes me is just how many people blindly show up at a car dealer to purchase a vehicle without the knowledge necessary to make a responsible purchase from a loan standpoint. When you do this, you give control to the dealer to bash your credit position over your head and intimidate you into a selection that you quickly regret after you get home and have time to
think about your purchase. But you now are stuck in a legal and binding contract with a lender that you are obligated to pay. Once the contract is cashed, you are an owner. I have seen a contract go bad many times because of the sour taste regarding the entire transaction. This will further damage your credit, the very thing you are trying to restore. Impulse purchases of this nature are just plain bad for the consumer. All the while, the salesman cashed his commission check. And you are stuck. No fun. Knowing what you are qualified to purchase is even more important with subprime credit. Having an honest, nonbiased evaluation from a qualified loan consultant just makes sense. This takes the worry and mystery out of the equation. Making the correct choice in what to buy is just as important as obtaining the loan approval. I cannot count how many times I have worked with subprime clients that just have to have the Audi, BMW, Mercedes, or Range Rover, and the list goes on. Now, these are not necessarily bad vehicles. However, when rebuilding your credit, it is important to have a trusted, qualified consultant to help guide you in making the right vehicle purchase. Many subprime lenders have a HOT list of vehicle makes and models that have a proven history of reliability in their loan portfolio. This allows the lender to grant an approval when they would otherwise turn a deal down. You see, with subprime credit, the lender is not just looking at the client’s credit. They are also looking at the type of collateral they are lending on when making an approval. They, of course, want the loan to perform well just as much as you do, hence the HOT list. Over the years, I have served countless family’s needs to the point where they will call me with an idea of the vehicle they want to purchase, and I handpick the right vehicle for their situation. I will often have the loan approved and deliver the vehicle to their home before they have even taken a test drive. It is more work on my part, of course, because I generally do the shopping for them. I test drive and inspect up to four or five vehicles and select the best one. Now, these types of transactions take a bit more time on my and my client’s part, but it has served me well from a repeat and referral standpoint over the years. Many people hate the car shopping experience and want to avoid the pitfalls of getting jammed into a vehicle they will regret purchasing. That is where I come in. Having us do the shopping for and or with you is not required to getting approved with MyWayAutoLoan, but it is a good option in some cases.
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We welcome the opportunity to show you how My Way Auto Loan can benefit you. Contact us today.