When a lender reviews a credit application, they’re looking for low risk. On each application, they take a chance on borrowers whose only argument is in numbers. Those numbers tell a story of risk.
That’s the blunt truth, really- lenders don’t approve a person, they approve financial data and information. Here are five key things that lenders look for in risk study.
1. Credit History
How do we all make predictions in life, sports, personal relationships, or business? Not sure about you, but the first place we look for predicting the future is the past. Track records are important for a reason- they’re a real representation of what someone has done, and a good predictor for what they will do next. That’s how lenders view credit history. It’s a record of who someone is financially and how they may act as a borrower.
Important points in credit history include:
- Record of payments (if they’re on-time or late)
- How many late payments are owed
- Amount owed
- Length of credit history
- Types of credit accounts (mortgage, credit card, etc.)
- Number of open accounts.
These all paint a picture of financial behavior.
2. FICO Score
A big one- big enough that we can’t fully explain it in this quick guide. Basically, the FICO score is a numerical summary of a credit report. Credit reports are a summary of credit history.
Everyone actually has more than one FICO score: we all have one from each credit reporting agency. The FICO used on an application depends on which agency a lender uses. Experian, TransUnion, and Equifax all generate a credit report (and so, a FICO score). The FICO scores from separate agencies will be pretty similar, but the credit agency your lender uses can affect the outcome of a credit application.
*At Roadrunner Financial, we use Experian Auto Score 8.
3. Debt to Income Ratio (DTI)
Percentage of monthly income that the borrower already pays toward debts.
When this number is high, it’s a clue that the borrower has more debt than they can handle. Most lenders have caps on this percentage to weed out applicants who have already taken on a lot of debt (and probably can’t take on much more). The limits on DTI are different for each lender but as a rule of thumb, a livable DTI is usually under 40%.
4. Payment to Income Ratio (PTI)
Percentage of monthly income that would be spent on the monthly vehicle payment.
This factor is key to understanding if borrowers can afford their new vehicle and pay all of their bills. If the monthly payment can most likely fit into their budget, then they are seen as having a lower risk of not paying (a.k.a. defaulting on) the loan.
5. Will They Pay Back the Loan?
Lenders want number of defaults (not paying the loan back in full) and the risk of default as low as possible. Risk is measured with the values we covered (and other numbers that set off math class flashbacks) to make sure that the lender gets their money back. It’s also to make sure the borrower doesn’t put themselves in a bad financial situation. If the lender sees low risk, then that credit application will probably get approved.
Roadrunner is able to instantly consider all of these risk variables through our credit algorithm. With our technology, we’ve got risk analysis down to a science so you can get a credit decision on the spot. After financial info is considered, and the application is approved, the borrower is given an instant offer. Based on risk, the offer can vary in APR, downpayment, loan to value (percent of the vehicle value covered by the loan), length of the loan term, and monthly payment. When the borrower is ready to close, their offer is signed and they drive off with their newly funded vehicle!
*The above article is being provided for informational purposes only and shall not be considered any type of professional advice. Roadrunner Financial, Inc. (RF) does not warrant the accuracy of the information contained herein. Prior to utilizing RF as a lender, all dealerships are subject to underwriting approval by RF, in its sole discretion. No loans will be funded without a signed Dealer Agreement between the dealership and RF. All applicants for credit through RF are subject to credit approval. Other qualifications and restrictions may apply.