What Credit Scores Do Auto Lenders Use?
Learn the full range of financial criteria auto lenders use to assess your eligibility and terms for a car loan.
Auto lenders carefully evaluate a borrower’s financial history to determine eligibility for an auto loan and the terms offered. This assessment is a comprehensive process designed to gauge the risk associated with lending money for a vehicle. Understanding this evaluation can help individuals better prepare for the auto financing process.
Credit Scores Auto Lenders Consider
Auto lenders frequently use specialized credit scoring models to assess creditworthiness. FICO Auto Scores are industry-specific versions of the general FICO score, designed to predict the likelihood of default on auto loans. These scores typically range from 250 to 900, which differs from the standard FICO score range of 300 to 850. There are multiple versions of FICO Auto Scores, including FICO Auto Score 2, 4, 5, 8, and 9. Lenders often prioritize these auto-specific scores for their tailored predictive capabilities.
VantageScore is another prominent credit scoring model considered by some auto lenders. While FICO Auto Scores are often primary, VantageScore offers a comprehensive view of credit behavior. Both FICO and VantageScore models consider similar underlying factors when calculating scores. Generic FICO scores, such as FICO Score 8 and 9, may also be used by lenders, especially by smaller institutions or in specific lending scenarios.
Credit Reports and Bureaus
Auto lenders retrieve credit reports from one or more of the three major national credit reporting agencies: Experian, Equifax, and TransUnion. The information in these reports forms the basis for credit score calculations and provides a detailed financial snapshot. While core data is consistent, minor variations can exist between reports from different bureaus.
Lenders scrutinize several key types of information in a credit report. Payment history is a highly influential factor, detailing timely and late payments, bankruptcies, and collections. The amounts owed, which includes total outstanding debt and credit utilization (the percentage of available revolving credit used), also significantly impacts the assessment. The length of credit history, indicating how long accounts have been established, and types of credit used, reflecting a mix of installment and revolving credit, are also reviewed. New credit inquiries from recent applications, and public record items like tax liens, are also reviewed.
Other Factors in Loan Approval
Beyond credit scores and reports, auto lenders consider various other factors to make a lending decision. A borrower’s income and employment stability are crucial, as they demonstrate the capacity to repay the loan. Lenders assess gross monthly income and the consistency of employment to ensure a reliable repayment source.
The debt-to-income (DTI) ratio is another significant metric, calculated by dividing total monthly debt payments by gross monthly income. Lenders use DTI to evaluate a borrower’s ability to take on additional debt; a lower ratio indicates less risk. The down payment amount also influences approval, as a larger upfront payment reduces the loan amount and lender risk. This can lead to better interest rates and improved approval odds.
The loan-to-value (LTV) ratio, comparing the loan amount to the vehicle’s market value, indicates the risk for the lender, as the vehicle serves as collateral. A lower LTV generally results in a greater chance of loan approval and potentially lower interest rates. The specific vehicle being financed, including its age, make, model, and mileage, can also affect loan approval and terms; older or higher-mileage vehicles sometimes pose more risk. The chosen loan term impacts both monthly payments and total interest paid, with shorter terms often having lower interest rates. A co-signer with stronger credit can significantly improve approval chances, especially for applicants with limited credit history or lower income.