For many of us, applying for a car loan can be a stressful and puzzling situation. One of the most difficult choices is choosing between a bank, dealership, and credit union. While it may seem obvious to get a loan from your bank or the dealership, a credit union may be the best option in many cases. Below are some criteria that credit unions use when considering the approval of an auto loan.
Credit Score Data
One of the most important factors in your car loan approval is your credit score. According to Dough Roller, “a credit union will pull your credit report from one of the major credit reporting agencies to retrieve your score and to check the following: Payment history, debt-to-income ratio, total open accounts, new accounts, and recent inquiries, etc.” It can be a good idea to get a copy of your credit report from all three of the major credit reporting agencies prior to applying for a loan. You typically have a better chance of getting a low-interest loan with a credit union even if your credit score is below 700.
When considering the approval of a loan application, the credit union uses analytics to try and minimize the risk of the loan going into default. According to Visible Equity, “loan analytics is benefiting from increased computing power, ease of manipulating data, and economies of scale.” Unlike a single credit report, loan analytics computes an enormous amount of other relevant data to form a more complete picture of applicants. This may allow credit unions to extend credit to customers who may have been denied based on a single credit report. The goal of customers and the credit union is to get the maximum value from each dollar spent.
Steady Source of Income
According to PayStubMaker, “banks, credit union, car dealers, and finance companies sometimes verify earnings when evaluating an auto loan application. The purpose is to affirm that the measure of your future salary is adequate to cover your projected scheduled installments. Most lenders will cap the monthly payment for a car loan at 10 – 15% of monthly salary.” A credit union will want to verify that you have a steady source of income that is adequate to pay back the loan and any other outstanding debts you may have. They will also want to see that you have been on the job for at least six months. In most cases, a higher income will improve your approval odds. It is important not to have long lapses in your employment history because this could raise red flags with the lender. The credit union will calculate your total gross income to come up with a maximum monthly payment amount you can afford based on your situation. Keep in mind that this number may be much less than what you anticipate or feel that you can afford. The credit union simply wants to make sure that you don’t overextend yourself to the point where you can’t pay back the loan.
In closing, applying for an auto loan can be a confusing and time-consuming process. If you are applying at a credit union, they may use your credit report, income, and loan analytics to see if you qualify for the loan. While you may have many options to choose from when applying for an auto loan, a credit union may offer you the best terms.
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