What is a Subprime Loan?If you have had credit problems in the past--meaning your FICO score is 600 or lower--then this is the type of loan you would qualify for. Subprime loans work the same as other auto loans but carry a much higher interest rate--often in the double digits. Since your lower score represents a greater risk for default, banks want to charge more to recoup their investment in the off chance you default and they have to repo your SUV. If you are in this segment, then there are several developments that might affect your ability to receive a car loan in the future. Here is a look at them:
Changing LandscapeBanks are no longer seeing healthy returns on subprime auto loans. In fact, it is spiraling towards the opposite direction. Fox Business reports banks are losing more money on defaulted auto loans. There are several reasons for this. First, when you cannot make your payments anymore, the bank comes and repossesses your SUV. Once they gain possession of it, they usually sell it--at an auto auction--to recoup some of the losses they incurred from the default. However, even banks offering prime auto loans are only recovering 51 percent of the unpaid loan balance on average, according to Fox Business. This is due to the declining value of vehicles as they hit the market for a second time. Think of it this way: if you’re a bank lending money to people who cannot pay you back, and when you collect the collateral you are only earning half of what you were owed, you are going to shift strategies. And this is exactly what banks are now doing.
Tightened StandardsA great representation of where auto lenders are heading is Wells Fargo & Company. Fox Business reports that for the first quarter of 2017, the bank had 29 percent less auto loan originations than it did for the same quarter in 2016. This is a common practice going on across the board as lenders, seeing the losses average over 10 percent on auto loan investments, are tightening restrictions on who can finance a vehicle. How this affects you is determined on a variety of factors.
How Restrictions Affect Your Loan EligibilityIf you have experienced little to no credit problems in the past and carry a FICO score in the 700 or 800s, these developments won’t concern you much. Alternatively, if you have had credit problems in the past, you might find it more difficult to obtain financing this time around, and if you do receive a loan for your new SUV, then you might find you’ll pay a higher interest rate as banks try to recoup their losses. The first thing to know about fixing your credit is understanding it's not only possible, but easier than you probably thought. This is why it’s important to prepare for these new standards. However, before we touch on this, let’s go back to the source of this shift: repossessions. You might find yourself in a situation where you are struggling to make payments on your SUV. If you are in this spot, here are some things you can do
- First, you should contact your lender and explain your situation. While the bank has no obligations to help you, many have programs in place where they can break up your past due payments, have you skip a month to get back on track or do a loan modification, where they extend the repayment term of your loan to make the monthly payments lower.
- Additionally, you should take this time to review your finances. What changed in your income or spending behaviors that’s preventing you from making payments on time?
- You can also consult outside help such as a reputable consumer credit counseling agency. They can work with your auto lender to create a repayment plan based on your budget.
- Meanwhile, if you are looking to finance an SUV in the future, here are some of the things you can do now to make you a better candidate:
Examine Your Credit HistoriesDid you know one in five people have inaccurate information in their credit reports? Inaccurate information can result in a lower score, making it less likely you’ll receive an auto loan. Therefore, you should order your three credit reports and examine them. If you find any discrepancies on either your TransUnion or Equifax reports, you can use Credit Karma’s disputing tool. Alternatively, you can follow the protocol outlined by the credit bureaus for disputing an item.
Make Timely PaymentsYour payment history is the biggest factor influencing your credit. With this in mind, if you have missed a few payments, contact your creditor to arrange a way to get your account current. Similar to auto loans, many lenders have programs available to help you. This step will help you get your payments back on track, and while it will take some time to see your credit score improve from this, rest assured, it will.
Reduce DebtAnother factor auto lenders examine is how much of your available credit you are using. If you have a credit card with a $1,000 limit, and your balance is consistently around $900, it indicates you are reliant on your credit for other expenses--which is a red flag. Therefore, you want to lower your balances and refrain from using credit when you can. As you pay your balances down, your debt-to-income ratio improves, making you a better candidate for an auto loan.
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