DETROIT – High credit scores remain important for getting an auto loan, but in many cases they are no longer the chief factor lenders look at.
Instead, financial institutions are zeroing in on debt-to-income ratio to determine the likelihood of a consumer paying back a car loan, says Gary Allgeier, director-financial services for the Suburban Collection, a 48-franchise dealership group with stores in Michigan and Florida.
“Debt-to-income is probably more important today than it ever was,” he says. “It’s critical, but often its importance is an unknown.” And sometimes it can override a prime credit score for determining if a car shopper qualifies for financing.
“Someone could have a 760 FICO (Fair Isaac Corp.) credit score, which is quite good, but if their debt level is high, they are not going to get a loan,” Allgeier says at a North American International Auto Show breakfast meeting here organized by Inforum, a women’s business group.
The nation’s credit freeze has affected auto lending, making it more difficult for consumers to get financing. Lenders are more reluctant to take the chances they once did.
“Debt to income is the No.1 reason people are being declined. In many cases, it doesn’t matter what your FICO score is,” Allgeier says. “It is how much money you owe that can worry lenders.”
For instance, if a consumer with a $1,000 monthly net income is using half that to pay off debts, including mortgage payments, the resulting 50% debt-to- income ratio, or DTI, sounds an alarm today.
“Fifty percent is when lenders start to get…I guess the word is ‘suspicious,’” Allgeier says. It becomes toxic when it gets past 60%. “Even if someone had an 800 FICO score, a debt like that is when creditors say, ‘How can you possibly repay a loan?’” he says.
“You used to be able to get loans under those conditions, but no more.”
Lenders now insist car buyers have low debt, a large down payment and a quicker pay-back schedule. Creditors are scaling back on 72- and 84-month car loans.
FICO scores sometimes are misleading if they focus on prior borrowing habits, rather than current circumstances. People may have a credit history of conscientiously paying their bills on time, but they may lack the wherewithal to continue to do so if they recently lost their jobs.
Yet, their FICO scores could remain high, at least temporarily, while they amass debt due to lack of income.
“You can almost predict who is about to go bankrupt by looking at their credit bureau report and credit-card use,” Allgeier says. “Bankruptcy is usually the result of people whose lives have been disrupted by a job loss.”
But even with today’s greater restrictions on borrowing, it’s not nearly as bad as what automotive consumers faced in 1975, he says.
Back then, a car buyer typically had to come up with a down payment of $5,400 in today’s money. All taxes and fees were separate from monthly payments, which were the equivalent of $700 a month over 36 months.
“That’s pretty much all that was available,” Allgeier tells Ward’s. “We’re not even close to those payment pressures.”
Yet, some consumers with high FICO scores and low debt mistakenly think they cannot get car loans in today’s harsh economic environment.
“I known business owners with 800 FICO-plus scores who assumed they can’t get a car loan,” Allgeier says. “We’ve got to let people like that know credit is out there even though there is less lending and more restrictions.”
His advice to consumers: Protect your credit. And if you have good credit, protect yourself from identity thieves. “No one steals the ID of a person with bad credit.”