Four Auto Loan Approval Factors for Car Dealerships
When customers walk into your dealership looking for a new vehicle, you want to make a sale in any way you can. Some customers won't have ideal credit profiles or much cash to put down on their new vehicles. As a dealer, understanding the most important factors in auto loan approval can help you reassure customers who may assume they won't qualify for financing, increasing your chances of closing the sale.
Below, learn the most significant factors impacting auto loan approval. Then reach out to
Edge Financial Services, LLC, to expand your financing options with a
financial dealer who specializes in working with borrowers with bad credit.
What Factors Do Lenders Consider for Auto Loan Approval?
If your dealership is like many, the majority of customers walk in with the intention of financing a vehicle rather than paying for it in cash. Some customers won't have much knowledge of how the financing process works or what auto loan approval factors affect their financing eligibility and options.
Explaining auto loans and financing options clearly to potential buyers can help them feel more comfortable moving forward with a purchase. Even if one of these factors is not ideal for a buyer, they may meet other criteria that improve their eligibility.
Below are the most significant factors lenders consider for auto loan approval.
Credit Score and Credit History
A customer's credit score and credit history both play significant roles in auto loan approval. A credit score is an indication of how likely a borrower is to pay back their loan on time. Meanwhile, their credit history reveals how they have handled bills and loans in the past.
Often, borrowers with low credit scores or little credit history face challenges in qualifying for auto financing. However, some lenders work specifically with these types of borrowers and minimize their risk in other ways, such as by increasing interest rates or requiring co-signers.
Debt-to-Income Ratio (DTI)
A person's debt-to-income ratio (DTI) is a measure of how much of their monthly income currently goes to debt payments. If a person's DTI is too high, they may not reliably be able to afford another loan payment each month, increasing the likelihood that they would default on an auto loan.
Lenders often consider anyone with a DTI of 45% or higher to be high risk. Meanwhile, a DTI of 36% or lower is considered excellent and will often lead to the best loan terms.
Debt payments that may be factored into this percentage include:
- Credit card debt
- Personal loans
- Mortgages
- Other auto loans
Loan-to-Value Ratio (LTV)
Loan-to-value ratio (LTV) is a comparison of the amount of money a customer is borrowing vs. the actual value of the vehicle. The customer's down payment amount plays a significant role in this auto loan approval factor, as a higher down payment leads to a smaller loan.
The higher the LTV, the greater the risk to lenders. An excellent LTV is usually considered to be 80% or lower, while an LTV of over 100% would be considered high risk. This would mean that the customer is borrowing more than the vehicle is worth, which would make it challenging for the lender to pay off the loan by seizing the vehicle and selling it if the borrower defaulted.
Employment History and Income
Finally, lenders will want to know that a borrower has a stable income that will allow them to continue making loan payments through the duration of the loan. They often check the borrower's current income and their employment history. In many cases, borrowers look for at least one year of steady employment to confirm that their income is stable.
Contact Edge Financial Services LLC Today
Knowing these auto loan approval factors can help you better guide potential customers through vehicle purchases in your dealership. Being unable to provide financing to certain customers is just one of the challenges faced by dealerships, but Edge Financial Services LLC can help you expand your lending options.
Contact us today to learn more.
