The Impact of Vehicle History on Loan Performance

The fascinating world of dealership operations involving new and used vehicles, loan performance, and underwriting guidelines covers a vast number of industry elements working together. Getting the correct loan and vehicle to the right person involves several specific steps to get it right.

New Car Underwriting Guidelines

The average price of new cars and trucks is at all-time highs; according to Cox Automotive, the average transaction price stood at $48,247. Lenders have expanded the number of months good credit borrowers can take to repay a loan; while the average term is now 72 months; lenders such as Chase Bank are going 96 months.

Buyers must be fully aware of the repercussions of longer-term loans coupled with a no-down payment strategy. Financing a new car is straightforward, and the burden of approval falls on the applicant. On new vehicles, dealers can charge up to the MSRP plus tax, license, documentation, and recording fees, GAP (Guaranteed Auto Protection), and mechanical breakdown insurance (MBI).

Plenty of options are available for “good credit borrowers” who want a great deal on their car and auto loan. Substantial down payments are the key for lenders. With the massive depreciation of new cars, there is a delicate balance that lenders and dealers must take when crafting the right loan package for their customers.

Lenders use the Rule Of 78, a method used by lenders when calculating interest charges on a car loan. Short-term installment lenders use the Rule of 78 for subprime loans. In the United States, the Rule of 78 is illegal for any term over 61 months in most states. Simple interest loans are prevalent and recalculate interest monthly for even distribution.

Always check the GoodCar vehicle history to describe any recent updates to a vehicle’s history. Each time a vehicle goes into the shop, the mechanic must note the mileage. This is a key to knowing if the odometer has not been altered. If purchasing a used car, check the GoodCar report for the latest title change and any other changes. Never buy a used car without knowing the vehicle's history.

Used Car Underwriting

Used car values have an indirect road to travel before they show up polished and ready to be financed on the dealer’s lot. Large multi-brand and independent dealers may recondition trade-in cars for repurchasing at their used lot or buy them at auction houses nationwide.

The so-called “Savvy used car buyer” may try to buy an auction car to save a few hundred dollars. This is a mistake. Dealerships send highly trained managers to these auctions to buy value-laden cars for resale. Untrained car buyers do not have the proper knowledge for this type of transaction.

Underwriting Guidelines

F&I managers will look at several factors when placing a loan for approval. The significant factor here is the customer’s FICO score and income. Each dealer has a specific procedure to deal with a particular FICO score. Consumers with FICO scores of 680 and above can generally purchase any vehicle they choose as long as the underwriting process agrees. Buyers with 680 or less will have restricted purchase options.

Underwriting Factors include debt to income, payment to income, cash down payment, employment history and stability, residence history, prior credit tradelines, and collateral.

Vehicle History and Loan Performance

High-mileage cars and trucks are becoming more acceptable in the marketplace, and the 150,000-mile barrier is changing. Loan performance has been boosted because cars are engineered and manufactured better by both American and Foreign automakers.

Until the last few decades, older, poor-performing cars went to sub-prime financing customers, which hindered loan performance. In the last few decades, American cars have caught up to foreign brands in reliability and roadworthiness. These improvements in used cars have, in turn, improved the loan performance for many subprime and prime banks.

One of the old general rules is that vehicles older than ten years and over 150,000 miles are the cutoff for obtaining financing. However, a Buy Here/Pay Here lot may offer financing beyond this general rule because the lot or private investment money carries the paper (your loan). Expect a sizeable down payment and much higher costs.

Again, the crucial factor is the FICO score and income of the primary borrower. Another key to financing an older vehicle is the loan amount must be below Book Value, including taxes and fees. Kelly Blue Book is the de facto standard in determining used cars and trade-in values. These numbers are updated daily or weekly and come from the Manheim Value Index.

Values

Sources for used and new car lending have skyrocketed, with traditional banks, credit unions, subprime lenders, and private paper getting in on the action. Restrictions abound in the used vehicle lending space. Credit scores aside, some lenders find it harder to value a used vehicle accurately. This is why lenders prefer new vehicles; they are easier to determine in value.

Manheim is the 800 lb. gorilla in the used car business. The Manheim Index keeps track of the used vehicles car dealers buy at auction. The index measures prices accounting for mileage, seasonal factors, conditions, and so on. Cox Automotive and KBB.com publish the index, which helps used cars and F&I managers value the car for loan purposes.

Used vehicle lending has inherent risks to the dealer and lender if the vehicle is not valued correctly. A used car’s value continues its depreciation cycle at a rapid pace. Second, a used car’s value is further depreciated because of the likelihood of uncovered mechanical issues. Overall, the older a vehicle has become, the riskier the loan is to the lender. Vehicle lenders do not like risk!

Another deciding factor is that dealers will be asked to repossess if the used vehicle breaks down during the loan and the borrower defaults. If the car is not valued correctly before the loan, additional risk is incurred if the borrower defaults.

The best place to purchase a used vehicle is an established dealership. Dealers set general guidelines for specific age, mileage, and the minimum financing amount. If at all possible, borrowers should try to buy a new vehicle. Aggressive dealerships will use every resource at hand to get a willing buyer into a new car or truck.

The general Rule of 10 years and 150,000 miles may be changing. A study by Car and Driver in 2021 found the average age of a vehicle on the road is 12 years, and the trend continues its upward slope. Every manufacturer has concentrated on improving quality across the entire product line. Used cars are getting better, lasting longer, and traveling more miles. Automotive lenders are coming to the table with new financing options based on the longer-lasting used cars and trucks trend.

Red Flags on Vehicle History Reports

The FTC warns consumers of the rising epidemic of scam artists posing as legitimate vehicle history providers. Always use a service like GoodCar and watch out for the red flags. Do not be swayed by a salesman’s enthusiasm or the low price.

Here are a few red flags to watch for:

• Too many owners, and very rarely do quality cars get passed around and sold to several different owners. If there are too many owners, there may be something wrong.
• Always look for any structural damage or airbag deployments. Not all accidents are the same because not all repair shops are reputable.
• Be aware of title washing. Scammers will title a salvaged vehicle in several states in a few years to hide the salvage status. They accomplish this by titling a car in states with loose title laws.
• Everyone has heard of a salvage title, and the car may be returned to a sales channel with a subtext of “it was only a bumper.” Do not be fooled.
• Odometer readings are a bright red flag. The odometer mechanism is easily changed on older vehicles; however, newer cars are improving. Always look at the odometer with a wary eye.
• Last, be careful of spotty service records and long periods of no oil changes. Also, look for any abnormal liens on the vehicle. Lien holders can repossess the car from an unwitting owner.