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Susan Tompor: What it takes for risky borrowers to get a car loan | Business

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Car buyers never had an easy time finding a decent car loan if their credit wasn’t up to snuff. But lately, they’re needing more money for a down payment to get into that car and they’re staring at higher rates than many would expect.

Lower income workers have been hit hard during the pandemic as they experience big layoffs at retailers or restaurants. And if they’ve held onto a job, many are clocking far fewer hours under capacity limits designed to halt the spread of the coronavirus.

Many struggling workers are the most likely to be hurt financially by the pandemic, economists say, and the least likely to be able to adjust quickly over time economically.

How struggling households take on debt matters, especially now.

It doesn’t mean that subprime borrowers — those with credit scores in a range between 300 to 600 — can’t get a car loan.

Many, though, must jump through more hoops, as lenders become increasingly concerned about the economic prognosis for the months ahead.

“The loans they are being offered are less attractive and less workable,” said Jonathan Smoke, chief economist for Cox Automotive.

“The terms are shorter, the down payment requirements are larger, and the interest rates are higher, so combine those financial conditions with record high vehicle prices and you get a very unfavorable time to buy,” Smoke said.

In fact, Smoke said, loans to subprime borrowers are down the most of any credit category year to year.

Risky credit means more hurdles in 2020

Deep subprime loans — for borrowers with a 300 to 500 credit score — dropped below 3% in the second quarter, a record low since Experian began publishing the data in 2007.

Deep subprime had been as high as 5.25% of the loan originations in the second quarters of 2008 and 2009.

If you’re struggling but need a car, it’s best to review your options — and look for how to save for a bigger down payment and rebuild your credit score, including paying off some debt on any heavily used credit cards. Make sure you pay your bills on time to help boost your credit score too.

Experian Boost, for example, will allow you to sign up for a program where your Netflix account, phone and utility payments can count toward some limited FICO credit scores. Boost reports only positive payments. See www.experian.com/boost. Not all lenders use the same credit information affected by Experian Boost, however.

Whatever your credit score, it pays to check your credit report at www.annualcreditreport.com to try to clear up any mistakes or issues on your credit report before you shop for a car loan.

You can get free weekly online credit reports now through April 2021, as part of the financial breaks relating to the COVID-19 crisis.

Detroit credit union offers unique help

Some credit unions and others run special programs for credit-challenged consumers, so it can pay to shop around.

The strategy is to help people maintain a job, as many lower-income workers have trouble getting to and from work in metro Detroit without a car.

“It’s a necessity. You need a vehicle to get to work. You need mobility,” said Joumana Mcdad, chief strategy and innovation officer for One Detroit Credit Union.

The credit union has a program for first-time car buyers that offers rates of 8.99% on a car loan regardless of credit score.

The rate can drop to 7.99% for a student with a grade point average of 3.5 or higher — or if the borrower has completed working with a “Life Coach” through the United Way Center for Working Families partnership.

The loan requires a $500 deposit to be held until 12 consecutive payments have been made. Once that requirement is met, the deposit is transferred to a savings account in the member’s name.

The borrower must be employed for 90 days to assist in the underwriting process. No cosigner is required on the loan.

While 8% or 9% for a car loan rate doesn’t sound like a deal when car makers heavily advertised some 0% deals a few months ago, it is a bargain for subprime borrowers.

Mcdad said some car loans can be 17% or higher when someone has a low credit score or a limited credit history. Some predatory car lending at “Buy here, pay here” used car lots can be in the 25% range, she said.

The credit union launched the program in July 2019 and partnered with the United Way Center for Working Families.

The program has made 34 car loans so far, adding up to $465,000 in loans for first-time buyers.

“It wasn’t about making money,” Mcdad said. “It was more about the need in the community.”

She noted that most auto loan borrowers have a steady income and will make their car payments. But first-time buyers often get saddled with an unaffordable interest rate or end up being denied credit altogether.

The average car loan for the credit union’s program is around $13,000 with monthly payments around $240.

The average credit score in the program is 545 and in the subprime camp. Detroit’s average FICO score is 613, as of the first quarter of 2020, which is among the lowest for large cities in the U.S., according to Experian.

Finding the lowest interest rate possible is essential if you have really bad credit.

Someone who has a car loan rate in the 20% range is going to be badly underwater if they need to sell that car in several years. Their monthly payments would mostly be interest and they wouldn’t be building any equity in the vehicle.

“It really is a horrific cycle,” Mcdad said.

How do you steer clear of trouble?

One way to avoid being underwater on a car loan is to consider how much money you really have for a down payment.

If you put only 10% cash down on a car — and you have no trade in value to add to the mix — you’re barely covering the taxes, title and other fees, according to Melinda Zabritski, senior director of automotive financial solutions for Experian.

You could be closer to borrowing 100% of the value of the car or truck than you realize.

She said the interest rate on a car loan is typically higher if a consumer is borrowing a good deal of money on a low priced car or ends up with what’s known as a higher loan to value ratio.

Extending the length of a loan — as is popular to do today — can help you find a more affordable monthly payment, Zabritski said.

But you’re at a greater risk of owing more on the car loan than what the car is worth when you need to buy another car or truck down the line.

The average term for a new car was 71.54 months in the second quarter of 2020 — up from 67.97 for the same quarter five years ago, according to Experian’s data.

The average used car loan was 65.3 months, again edging upward.

Even someone with good credit might not build any equity in the car for roughly three years if you’ve taken out a six-year car loan, depending on the popularity of the make and model.

Don’t only dwell on the monthly payment. Review the interest rate you’re being charged.

All the low rates being talked about today do not apply to everyone.

Let’s take a glimpse at some used car loan data. The average rate paid by risky borrowers who fall into the deep subprime category was 20.93% for a 72-month used car loan taken out in the second quarter of 2020, according to Experian’s data. It has risen slightly from the average 20.31% for used cars for the same time a year ago.

By contrast, the average rate paid for a used car loan fell in the past year for borrowers with excellent credit scores. Borrowers in the super prime category saw average rates of 4% for 72-month used car loans taken out in the second quarter of 2020, according to Experian. The average fell significantly from 4.88% for the same time a year ago.

Subprime borrowers may not be locked out of car loans, but they’re not getting the deals that many other car borrowers are seeing in 2020.

Car loan rates, again in general, remain favorable in 2020.

If you have a good credit score, the best car loan rates are in the 2% range, such as 2.69% to 2.99%, according to Bankrate.com. Those car loan rates can be had with credit scores of 700 or better.

Banks and credit unions aren’t offering 0% rates but some manufacturers continue to offer a few here and there to those with great credit on select models. In general, many 0% deals now are targeted to move older models, including some 2019 models, according to Cox Automotive. It’s a very different landscape from April when 0% blanketed much of the industry. Now, it’s rare to see 0% for 84-month car loans.

General Motors, for example, is offering 0% APR financing for 60 months on the 2020 Cadillac XT4, XT5 and XT6. Ford Motor has a 0% for 60 months on 2020MY Fusion (gas), Escape (gas), Edge, Explorer and Expedition, with $1,000 trade assistance cash on the SUVs listed. Incentives vary by region and vehicle.

The average rate for a four-year used car loan is 4.96% — down from 5.33% at the beginning of the year, according to Bankrate.com.

The average for the five-year new car rate is 4.24% — down from 4.60% at the beginning of the year.

The fact that subprime lending was down in the second quarter shouldn’t be too surprising, given the pandemic.

“Between stay-at-home orders and fluctuating financial situations, the reality is that subprime consumers may not be in-market for a vehicle right now,” Zabritski wrote in a blog.

“The situation continues to be dynamic, which is something that lenders and dealers need to keep in mind and define strategies accordingly.”

The latest data on subprime car loans, Zabritski said, follows a trend that began five years ago when subprime auto loan originations began declining steadily.

Back in 2014, car sales were fueled by a big increase in lending to risky borrowers, so much so that federal banking regulators raised concerns about that surge. Making too many subprime loans can drive up the risk that a financial institution is lending to borrowers who cannot afford to keep up car payments — driving up defaults and harming consumers, as well as banks.

The stronger economy in recent years — before COVID-19 hit — could have meant that fewer auto buyers might fall into the subprime tiers, given an emphasis on improving one’s credit and a stronger jobs picture in recent years, Zabritski said.

And the economic fallout from fighting the coronavirus may mean that fewer households with low scores could have been shopping for cars, she said.

As for the forecast, the unemployment picture will clearly influence what’s available to borrowers with lower credit scores in 2021.

Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.

(c)2020 Detroit Free Press

Distributed by Tribune Content Agency, LLC.

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Letter: Vote for Kiesha Preston | Letters

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The residents of Roanoke, Virginia, need to get out of the box of voting based on party affiliation. It’s time to vote for the best candidate to do the job.

Kiesha Preston is running as an independent and is the best choice for Roanoke City Council. When she was only three years old, she was troubled because a local Kroger store removed the kiddie carts. She asked me how to get them back so she could shop beside me. I told her to go to the manager and she did. She stated her case, and a few weeks later those kiddie carts were back in the store.

Kiesha also has presented a bill to Congress that was approved. The Virginia Domestic Violence Victims Protection Act prevents domestic violence victims from not being able to rent an apartment because of bad credit as a result of their abuser ruining their credit.

These are but two examples of Kiesha’s tenacity and getting results. We need people on council who have no agenda and are truly willing to work for the least of us.

Kiesha is not intimidated by those in power and will hold her own to help those who cannot help themselves. This is why she is the right person to get the job done.

Please do not be discouraged because you are tired of the same old same old where parties are concerned. You have another choice so please vote for Kiesha Preston. She has been working tirelessly on behalf of the people without being elected to an official office. Just imagine what she can do once she is officially on City Council.

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This One Credit Card Will Get You the Most Cash Back Right Now

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Let’s admit it, choosing the right credit card can be a stressful process. There are so many variables to consider—from annuals fees to credit score requirement—not to mention the various rewards and benefits each card offers, and how those align with your lifestyle and spending habits. Then there are those hidden fees and interest rates you have to reckon with. In other words, it takes a lot of work to make a truly informed decision when it comes to choosing a credit card that’s right for you. Perhaps a good cash back program is high on your credit card priority list because, well, who doesn’t like some extra money in their pocket?

To help you decide on the credit card that is going to get you the most cash back, the experts at personal finance site WalletHub compared more than 1,500 current credit card offers. From that large pool, they narrowed down the field to the cards that offer cash back rewards, comparing those offers based on initial bonuses, rewards earnings rates, annual fees, and more. From that analysis, here are the best credit cards that will get you the most cash back right now. And for more money matters, check out This Is the State Where Your Money Is Worth the Least.

8

Alliant Cashback Visa Signature Credit Card

Best for: Cash back on all purchases

Cash-back rate: 2.5 percent

Annual fee: $0.00 for the first year; $99.00 after that

What kind of credit you need to get one: Excellent

Learn more about the Alliant Cashback Visa Signature credit card here.

If you are worried about having buyer’s remorse after choosing a credit card, put that into perspective by checking out What You’re More Likely to Regret Than Anything Else You Do.

7

Discover It

Best for: People with bad credit

Cash-back rate: 1-2 percent

Annual fee: $0.00

What kind of credit you need to get one: Bad

Learn more about the Discover It credit card here.

6

U.S. Bank Cash+ Visa Signature Card

Best for: Cash bonus for good credit ($200.00)

Cash-back rate: 1-5 percent

Annual fee: $0.00

What kind of credit you need to get one: Good

Learn more about the U.S. Bank Cash+ Visa Signature Card here.

And to make sure you have money to pay off those monthly bills, avoid The Biggest Career Mistake You’ll Ever Make, According to Experts.

5

Chase Freedom Unlimited

Best for: No APR on purchases

Cash-back rate: 1.5-5 percent

Annual fee: $0.00

What kind of credit you need to get one: Good

Learn more about the Chase Freedom Unlimited credit card here.

And for more things that will help you and your family stay on the right financial track, check out The No. 1 Sign You Shouldn’t Buy That House, According to Realtors.

4

Capital One QuicksilverOne Cash Rewards Credit Card

Best for: People with limited-to-fair credit and looking for low annual fee

Cash-back rate: 1.5 percent

Annual fee: $39.00

What kind of credit you need to get one: Fair

Learn more about Capital One QuicksilverOne Cash Rewards Credit Card here.

3

Citi Double Cash Card—18 month BT offer

Best for: Flat-rate rewards

Cash-back rate: 2 percent

Annual fee: $0.00

What kind of credit you need to get one: Excellent

Learn more about the Citi Double Cash Card here.

2

Capital One Savor Cash Rewards Credit Card

Best for: Dining and entertainment

Cash-back rate: 1-4 percent

Annual fee: $95.00

What kind of credit you need to get one: Good

Learn more about the Capital One Savor Cash Rewards Credit Card here.

1

Blue Cash Preferred Card from American Express

Best for: Most cash back overall

Cash-back rate: 1-6 percent

Annual fee: $0.00 for the first year; $95.00 after that

What kind of credit you need to get one: Good

Learn more about Blue Cash Preferred Card from American Express here.

And for more helpful information delivered to your inbox, sign up for our daily newsletter.

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Possible Raises Series B and Moves Fully Remote | State

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SEATLLE, Oct. 20, 2020 /PRNewswire/ — Possible raises $11 million in new equity funding to expand the team and to provide additional products for its customers. Union Square Ventures led the round, with participation from existing investors Canvas Ventures, Unlock Venture Partners, Columbia Pacific Advisors, Union Bay Partners, Tom Williams, and FJ Labs. The company has also secured $80 million in new debt financing from Park Cities Advisors.

Furthermore, the company is now fully remote and recently onboarded software engineers from across the US and the globe. Possible is committed to distributed work and actively recruiting for a number of other remote roles.

Possible provides friendly access to capital and a simple way to build credit for people who otherwise would get a payday loan or get hit with a bank overdraft fee. The company uses real-time financial data, rather than a credit score, to qualify customers and provide funds instantly through its iTunes and Android apps. Unlike payday loans or overdraft fees, Possible loans are paid back in small installments over multiple pay periods to allow customers to catch their breath. By reporting on-time payments to the credit bureaus, Possible enables its customers to build credit history and eventually qualify for cheaper, longer term financial products. On average, customers with low credit scores see their scores increase by 70 points within 4 months.

Tony Huang, Possible’s CEO explains, “So many people who live paycheck to paycheck can’t afford to build credit history. We’re helping them do it for the first time while providing them with a friendlier and more affordable small-dollar loan.”

Since launching in June 2018, Possible’s given out loans to hundreds of thousands of customers, helping meet short-term cash needs while building credit history or establishing credit for the first time. These customers, often with bad credit or no credit history, are underserved by traditional banks. Possible fills that gap and provides financial access to those who need it most while giving them the means to climb their way out.

Gillian Munson, Partner at Union Square Ventures, explains the thesis behind their new investment, “Through tech innovation, data-driven insights, and a focus on the customer, Possible is well on its way to winning the hearts and minds of both consumers and regulators alike, and building a trusted brand that endures.”

A 2019 Experian study shows 34.8% of consumers are subprime and can’t access money when they need it. They pay $106 billion in punitive fees each year to the existing financial system for short-term credit products. These consumers are trapped in predatory debt cycles of payday loans and overdraft fees without the means to rebuild their credit or improve their financial health. While there has been a number of new tech-enabled products in this space, most lead to similar debt cycles and don’t address the harder issue of improving long-term financial health. That’s where Possible comes in.

Since the company is now fully remote, Possible is actively hiring talent across the globe. Tyler, Possible’s CTO, explains, “Being fully distributed allows us to access the talent pool of the entire world. Our success so far is a reflection of the quality of our people, and we believe hiring globally will allow us to find exceptional people to join us in achieving our mission.”

About Possible

Possible is a fintech company based in Seattle, Washington. The company provides a friendlier and easier way for customers to access capital while also building credit history and improving long-term financial health.

About Union Square Ventures

Union Square Ventures is a thesis-driven venture capital firm based in New York City. USV manages over $1 billion in capital across seven funds and focuses investments in portfolio companies with the potential to transform important markets.

About Park Cities Advisors LLC

Park Cities Advisors LLC (“PCA”) is a privately held, SEC-registered alternative credit manager based in Dallas, Texas. PCA is focused on private lending across the specialty finance and FinTech sectors and provides debt capital to companies across a variety of industries through asset-based financing transactions.

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