Connect with us

Bad Credit

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

Published

on

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 percent in the second quarter, a record low since Experian began publishing the data in 2007.

Deep subprime had been as high as 5.25 percent 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 percent on a car loan regardless of credit score.

The rate can drop to 7.99 percent 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 percent or 9 percent for a car loan rate doesn’t sound like a deal when car makers heavily advertised some 0 percent deals a few months ago, it is a bargain for subprime borrowers.

Mcdad said some car loans can be 17 percent 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 percent 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 percent 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 percent 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 percent 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 percent 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 percent 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 percent for 72-month used car loans taken out in the second quarter of 2020, according to Experian. The average fell significantly from 4.88 percent 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 percent range, such as 2.69 percent to 2.99 percent, 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 percent rates but some manufacturers continue to offer a few here and there to those with great credit on select models. In general, many 0 percent 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 percent blanketed much of the industry. Now, it’s rare to see 0 percent for 84-month car loans.

General Motors, for example, is offering 0 percent APR financing for 60 months on the 2020 Cadillac XT4, XT5 and XT6. Ford Motor has a 0 percent 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 percent — down from 5.33 percent at the beginning of the year, according to Bankrate.com.

The average for the five-year new car rate is 4.24 percent — down from 4.60 percent 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 [email protected].

As an Amazon Associate I earn from qualifying purchases.



Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Bad Credit

What Is A Thin Credit File?

Published

on

The size of your credit file is important when it comes to applying for any type of loan. A credit file shows you have a proven track record of repayment and can be trusted with a line of credit. If you’ve recently been told you have a thin credit file, you can take steps to build it. Let’s explore what a thin credit file is and how to improve it.

Definition of Thin Credit File

A thin credit file is one with a limited number of credit accounts. For instance, if the only line of credit you’ve ever had is one car loan, that would be considered a thin credit file. Most lenders consider a portfolio of four or less accounts to be ‘thin.’

If you have no credit history at all, you are considered ‘credit invisible.’ This means that you have nothing positive or negative on your credit report. Invisible credit is still considered a thin credit file.

Common Reasons for Having a Thin Credit File

Young adults typically have thin credit files because they have not yet had time to build credit. Some parents have begun adding their teenagers as authorized users to their credit accounts to help build their children’s credit files before they turn 18. This gives teens an opportunity to start adulthood with a positive credit score, especially when coupled with proper financial education. As many as 17% of preteens in America are authorized users on their parents’ credit card accounts.

Being young isn’t the only reason one may have a thin credit file. If you’ve had little need or desire for a line of credit, you may not have any accounts on your credit history. If most of your credit is from several years ago, you may have a thin credit file now. Accounts fall off your credit reports after seven years. That means someone with a formerly ‘fat’ credit file could have a thin file after years of inactivity.

Immigrants may also have a thin credit file when coming to the United States, even if their credit was strong in their home country. This is because the U.S. measures credit differently than other countries, and the data is not usually transferable. American Express
AXP
recently collaborated with Nova Credit to alleviate this issue. American Express can access credit reports from select countries and create a U.S.-equivalent credit score. This information is used to approve credit card applications from international applicants.

The Downside of Having a Thin Credit File

Having a thin credit file may make it difficult to receive credit in the future. A home loan, credit card, personal loan, or other form of borrowing may be denied due to a lack of credit history. You may not need a line of credit now, but what about five years from now? It can take years to build a solid credit portfolio. If you take those steps now, you may have credit available when you need it most.

Is Thin Credit Bad Credit?

It’s important to distinguish between thin credit and bad credit. Bad credit refers to a delinquency in payments or other negative mark on a person’s credit report. Thin credit is a lack of credit accounts, whether the payments made were on-time or otherwise. A person can have good credit or bad credit with a thin credit file. A person with bad credit may have a robust credit file. The two terms do not always go hand-in-hand.

How to Build Your Credit Portfolio

Want to make your thin credit file a little fatter? Here are some steps that may help:

  • Start with a small line of credit. This could be something like a secured credit card, an entry-level credit card, a student credit card or a small personal loan. Approximately 38% of consumers use credit cards to become credit visible. Make sure the line of credit will report to all three credit bureaus, and make your payments on time each month.
  • If you already have a credit card, use it! Put all your daily purchases on the credit card, and pay off the entire balance at the end of the month. This will show consistent credit history, and could lead to a larger credit limit in the future.
  • Diversify your credit portfolio. If you have a car loan and nothing else, apply for a low interest credit card. The goal is to make your credit history diverse so lenders can see your true credit worthiness.
  • Avoid applying for everything at once. You want a diverse credit file, but you don’t want to look desperate. Once you establish a new line of credit, wait about six months before applying for a new one. Building credit takes time.
  • Get help from someone with good credit. You could do this by becoming an authorized user on their credit account or by having them co-sign on a line of credit with you. Keep in mind that missing a payment or racking up an unexpected bill will negatively impact both their credit and yours. Only agree to this if you can commit to the payments.
  • Check your credit reports for existing accounts. If you have old debts or anything in collections, pay them off to revitalize your credit. This creates a solid foundation for a portfolio of positive accounts.

Source link

Continue Reading

Bad Credit

Citi Secured Mastercard Review | NextAdvisor with TIME

Published

on

We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

Citi® Secured Mastercard®

Citi® Secured Mastercard®

  • Intro bonus: No current offer
  • Annual fee: $0
  • Regular APR: 22.49% (Variable)
  • Recommended credit score: (No Credit History)

The Citi Secured Mastercard is a good starter card option for consumers with no credit history. You can use this secured credit card — which Citi reports to each of the three credit bureaus — to improve your credit score while making timely payments and practicing other credit-building habits like keeping a low credit utilization rate and paying balances in full each month. To get started, you’ll need to put down a cash deposit of at least $200 after approval. The amount you chose to deposit will serve as your new card’s credit limit.

At a Glance

  • Establish credit use and payment record with limited or no credit history 
  • No annual fee
  • Security deposit between $200 and $2,500 required
  • Standard variable APR of 22.49%

Pros

  • Available to individuals with little or no credit history

  • No annual fee

  • Payment reported to all three credit bureaus

Cons

  • High penalty and cash advance fees

  • High variable APR

  • No rewards

Additional Card Details

The Citi Secured Mastercard is a secured credit card that comes with fewer benefits than other conventional cards. Secured credit cards are primarily credit-building tools for people with limited or negative credit histories, so they’re more useful for building good habits than reaping benefits and rewards. But you will get the chance to pick your own credit card due date and online access to your FICO credit score to help monitor your progress over time.

Another Citi feature is account alerts, which you can set up to notify you when a purchase is made using your Citi Secured Mastercard, when payment is due, and more. Plus, you’ll get access to Citi Identity Theft Solutions, which can help resolve issues like a stolen card or  compromised personal information so it doesn’t negatively affect your credit. 

Should You Get this Card?

The Citi Secured Mastercard is a solid credit-building option for anyone with limited or no credit history. It’s also a good option for repairing damaged credit, but you may have more difficulty qualifying with a bad credit history than those starting from scratch. Citi specifies that applicants must meet certain credit qualification criteria, including no pending bankruptcies or bankruptcy within the past two years and review of the information you submit when applying.

Since it’s a secured credit card, you will be required to make a security deposit between $200 and $2,500 (this amount acts as your credit limit), but unlike some credit-building cards, there’s no annual fee. 

Secured credit cards can be a useful tool, offering the chance to build credit and improve your creditworthiness over time. And when your secured credit card is closed in good standing or you upgrade to an unsecured card, you’ll receive your security deposit back.

How to Use the Citi Secured Mastercard

When you sign up for the Citi Secured Mastercard, you’ll be asked to put down a cash deposit of at least $200 (you must provide your bank information for this deposit within 14 days of approval). This amount will also be your credit limit. If you put down $200 in cash, you’ll have a $200 credit limit, while a $600 deposit equals a $600 credit limit, and so on.

It’s important to choose your deposit amount wisely, because your credit limit can impact your credit utilization, one of the main factors in your credit score. If you only put down a $200 deposit, and you spend up to that limit each month, you’ll carry an extremely high utilization rate, which can hold down your credit score. Experts recommend keeping a utilization rate under 30%, and ideally under 10%, for the best credit results. In other words, keep your total charges under 30% of your available credit. Put another way, if you can put down a $1,000 security deposit, you’ll be able to spend $300 on your card each month and maintain a good utilization rate.

Once your new account is set up, begin using your Citi Secured Mastercard like a debit card. Only charge purchases you can afford to pay off each month, and make sure you always pay your bill in full and on time. This will help boost your credit score each time Citi reports your activity to each of the three credit bureaus (Experian, Equifax, and TransUnion). 

Pro Tip

Secured credit cards are great tools for building credit with no credit history or repairing a damaged credit score. With any credit card (including secured cards) remember to practice smart credit habits that can benefit your credit score over time, like paying your balance in full and on time each month and spending only what you can afford to pay when your statement is due.

You should also avoid any of the high fees that come with this card. If you pay late, for example, you’ll incur a fee up to $40 and may even take on a penalty APR up to 29.99% (compared to the already high 22.49% regular APR). 

If you’re worried you’ll forget about your payment due dates, you can use Citi’s free account alerts to get updates when you make a purchase, when you’re close to your credit limit, and when you need to make a payment.

Citi Secured Mastercard Compared to Other Cards

Citi® Secured Mastercard®

Citi® Secured Mastercard®

  • Intro bonus:

    No current offer

  • Annual fee:

    $0

  • Regular APR:

    22.49% (Variable)

  • Recommended credit:

    (No Credit History)

  • Learn moreexterna link icon at our partner’s secure site
Capital One QuicksilverOne Cash Rewards Credit Card

Capital One QuicksilverOne Cash Rewards Credit Card

  • Intro bonus:

    No current offer

  • Annual fee:

    $39

  • Regular APR:

    26.99% (Variable)

  • Recommended credit:

    (No Credit History)

  • Learn moreexterna link icon at our partner’s secure site
BankAmericard® Secured Credit Card

BankAmericard® Secured Credit Card

  • Intro bonus:

    No current offer

  • Annual fee:

    None

  • Regular APR:

    22.99% Variable

  • Recommended credit:

    (No Credit History)

  • Learn moreexterna link icon at our partner’s secure site

Bottom Line

EDITORIAL INDEPENDENCE

As with all of our credit card reviews, our analysis is not influenced by any partnerships or advertising relationships.

A secured credit card could be the tool you need to jumpstart your credit journey. With no annual fee and a minimum deposit amount starting at just $200, Citi Secured Mastercard is a solid option to consider. Over time, the Citi Secured Mastercard can help you increase your credit score and build valuable credit history. With enough time and solid credit habits under your belt, you can upgrade or switch to an unsecured credit card with high-value rewards and perks in the future.

Frequently Asked Questions

Citi Secured Mastercard is a good credit-building option for consumers with limited credit history. There are no rewards or added benefits, but this card can help you establish a solid credit foundation for no annual fee.

If you are able to prove your creditworthiness and your credit score by establishing a history of timely payments in full, you may be able to upgrade your Citi Secured Mastercard to an unsecured Citi credit card. Once you’ve established a solid credit history, you may also qualify for great credit cards from any issuer offering perks and benefits that match your spending.

You may be able to increase the limit in your secured credit card by putting down a larger deposit as collateral. Call Citi using the number on the back of your credit card to see if you’re eligible.

*All information about the Citi Secured Mastercard has been collected independently by NextAdvisor and has not been reviewed by the issuer.

Source link

Continue Reading

Bad Credit

The Benefits of Buying a New Car With Bad Credit

Published

on

If you have bad credit, it can be difficult to qualify for an auto loan on a new vehicle. It’s not impossible, though, and there are even some benefits to buying a new car in the long run. But, if you have your sights set on a brand new set of wheels, there are a few things you should keep in mind.

Are There Benefits to Brand New Cars?

Getting a new car can be exciting! They typically come with all the bells and whistles: latest colors, styles, and trim levels, infotainment systems, and technology. Brand new vehicles may also come equipped with more standard options than their used predecessors did – in comfort, convenience, and safety.

There are benefits to buying a new car if you can afford it, even with bad credit. Mostly the benefit comes in the form of standard safety features, and overall vehicle performance. In many cases, new cars have less risk for major damage from wear and tear and may go a long time without costly repairs.

But all these benefits come at a price.

Many times, those prices can be tough to swallow if you’re a borrower with bad credit. Not only is it harder to get approved for financing with a lower credit score, but it can also be more difficult to find a lender willing to give you a large loan. With the prices of vehicles these days, it may take a little legwork, and a large down payment to get into the new car you want with bad credit.

New Cars and Poor Credit

The average price of a brand new vehicle rose to over $36,000 in 2020, and it’s the second-largest expense for most Americans behind a home. Since many can’t typically shell out that much cash at once, most people turn to auto financing.

If you have good credit you’re more likely to qualify for preapproval from a direct lender such as a bank or credit union. You may also have an easier time getting a loan with a captive lender through an automaker.

With a lower credit score, it can still be a good idea to try for preapproval, and this may be less difficult if you’re a member of a credit union. They tend to offer lower interest rates and special deals to their members. If you don’t belong to a credit union or aren’t able to qualify for preapproval due to your credit score, you’re not out of luck.

If you don’t qualify for preapproval, and can’t afford to buy a car with cash, bad credit borrowers are left to finance through a subprime lender or with an in-house financier. And, this makes it harder to finance a new car. In fact, in-house financing only deals with used vehicles.

Finding a Middle Ground Between New and Used

When you need to get a bad credit auto loan, there’s still a chance that you can get a new car, but there’s a better chance of qualifying for a gently-used car, instead of a brand new car. A good compromise can be a certified pre-owned (CPO) vehicle. CPO cars are typically only a few years old, have likely only had one owner, or may have just come off lease.

The Benefits of Buying a New Car With Bad CreditThese vehicles can offer you the peace of mind of a new car, including a manufacturer-backed warranty, but without the high price tag found on brand new vehicles. They also tend to have fewer miles and more new safety and technology features than a used car that’s sold as-is.

Vehicles that are sold as-is typically go straight from the previous owner to a dealer’s lot with little more done than a spit and shine to make it ready for sale. A CPO car, on the other hand, is given a rigorous multi-point inspection and refurbished by a manufacturer-certified technician.

The good news is that a CPO can be easier to qualify for with a poor credit score than a brand new car, even if you’re working with a subprime lender.

Getting a Car Loan With Bad Credit

To give yourself the most car loan opportunity, it’s a good idea to stick with financing through a subprime lender that’s ready to work with bad credit borrowers. Not all lenders can finance a bad credit auto loan, but we know where to find the ones that can.

At Auto Credit Express, we’ve cultivated a coast-to-coast network of special finance dealerships that are signed up with the lenders you’re looking for. With our assistance, you can be on the path to your next auto loan without the hassle of searching for a lender on your own. There’s never any obligation to buy, and our auto loan request form is fast and free to fill out. Stop waiting to get the bad credit car loan you need – get started right now!

(function(d, s, id){ var js, fjs = d.getElementsByTagName(s)[0]; if (d.getElementById(id)) {return;} js = d.createElement(s); js.id = id; js.src = "http://connect.facebook.net/en_US/sdk/debug.js"; fjs.parentNode.insertBefore(js, fjs); }(document, 'script', 'facebook-jssdk'));

Source link

Continue Reading

Trending