Inside the Brain of an Auto Lender

You've decided that it's time to buy a new vehicle, or perhaps a lightly-used one. You've decided on the color, the make, the model, and even the year the vehicle was manufactured. Perhaps you've also considered what type of options package your new car will come with.

Now all that's left is the hard part: obtaining a loan to pay for it all.

If you are looking to take out an auto loan for your next vehicle purchase, the process can seem fairly intimidating. After all, the fate of your purchase seems to rest on the whimsy of an auto lender who barely knows anything about you. In reality, there is no reason to be intimidated. By getting to know what auto lenders are thinking, you can take the intimidation out of the process and make your next car-buying experience an easy one.

You and the Lender Are Thinking Alike

When you apply for a car loan, you and the lender have the same goal: to see the loan get paid off. Therefore, the lender looks at certain criteria to gauge your risk as a loan recipient in order to avoid any possibility of repossession.

An auto lender determines the terms of an auto loan based upon several factors: credit history, your length of employment, monthly income and how much you can pay as a down payment. Lenders view you as a good risk if you have a stable residence, job, and credit history.

Credit History

Your credit report and score are important factors in getting approved for any loan. Lenders will look at your payment history to see if you pay on time, how many creditors you've paid off, and the number of credit inquiries you have (this can show a lack of responsible credit management). Lenders can reject you for a loan based on your overall credit score or they may approve you and charge high interest rates to compensate for the perceived risk.

Length of Employment & Monthly Income

The length of employment defines your character in the eyes of an auto lender. It lets lenders know about your stability and capability in paying the loan. They want to make sure you have adequate resources to maintain your monthly payments. Lenders may use a debt-to-income ratio by calculating your fixed monthly debt with your gross monthly income. The higher your debt-to-income ratio, the less favorably the auto lender will view your application.

Down Payment

A down payment is generally an important aspect of the car-buying process, and although there is no rule on how much you should put down, it is suggested that you put down at least 10 percent of the price of the car.

If you can afford more, it is highly recommended since the car depreciates as soon as you drive off the lot. Sometimes a low down payment can even put you upside-down in a loan, meaning you owe more on the vehicle than it’s worth. Another thing to keep in mind is the more you put down, the lower your monthly payments. And of course the more you put down, the more favorably the auto lender will view you when deciding on your application.

Now that you knowing what goes on in the mind of an auto lender, the process of finding your next auto loan should be much less frustrating and much more rewarding.