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How Your Credit Score Affects Your Financing Rate

Original article can be found here

Check out this really informative article of how your credit score affects the interest rate you pay when financing a car.

Learn the role it plays and how to improve it

Before applying for a car loan, it's wise to check your credit standing. That will give you a pretty good indication of where you stand in the eyes of potential lenders.

Many people assume that few car shoppers have good enough credit to qualify for the cheapest, lowest-interest auto loans, but that's not so. According to Experian, one of the big three credit bureaus, about two-thirds of all new car loans last year were granted to people with "Prime" or better credit standing, and 44 percent of borrowers were in the highest category, called "Super Prime" in Experian's parlance.

You can obtain your credit information from any or all of the three big credit-reporting agencies, also called credit bureaus, which monitor consumers' credit information. (The others are Equifax and TransUnion.) They all track your past and present borrowing behavior and generate a three-digit score that supposedly summarizes your creditworthiness.

By law, you're entitled to one free report from each of the three major credit bureaus every 12 months. To order your reports, go to annualcreditreport.com.

There are plenty of promotions on the internet these days that offer to give you your credit score free of charge. They come from banks, credit unions, and credit card issuers, including big names such as Bank of America, Chase, Citi, and Discover.

Discover Financial Services recently started offering free FICO scores through its Credit Scorecard program, even to people who aren't customers. You'll need to hand over some personal data, including your Social Security number.

When you get your reports, scrutinize them for errors, because you can challenge any mistakes you find. And it's smart to correct any misinformation that could be depressing your score.

Though the reports may be free once a year, the scores often are not. You'll wind up paying about $7 for each from the credit bureaus themselves and about $20 each from other services.

In addition to loan and credit card payment history, the credit bureaus track your total available credit, current debt, and how much of your available credit you're using, among many other factors. You may also find negative information, such as late payments, missed payments, judgments, write-offs, and bankruptcies.

Your scores will almost certainly differ from one agency to another. Each may gather information from a slightly different list of creditors that report your payment activity to them, and they use different algorithms to turn your credit activity into a score.

Many Scores, Little Control

Credit scores are often generically called FICO scores. That's because a firm called the Fair Isaac Company developed the most widely used scoring algorithms, software it sells to the credit-reporting agencies and lenders. Fair Isaac constantly refines its FICO software in the same way that software makers offer successive generations of an app or computer program. Those algorithms are also tweaked for different lenders for different purposes.

That means there are many versions of the FICO score in circulation that are used by mortgage companies, credit card issuers, auto lenders, and others. Depending on who is pulling a score on you, your credit history may generate more than 60 different scores. You should realize, too, that your credit score fluctuates throughout the year as your various loan balances change or you apply for new credit and close existing accounts. Those are two good reasons not to obsess on the scoring number and on modest differences you may see between the different scores.

When you buy or obtain your free once-a-year scores from the credit reporting agencies, what you get is a branded score called a PLUS score, which is a FICO score with some finishing touches incorporated by the agencies. They differ from agency to agency for several reasons. Credit bureaus may not gather the same information on you. And you may see scores that use different scales: 300 to 900, 300 to 850, or something similar.

They're not the exact score that any given lender may be using to judge your loan application. Lenders buy scoring software from FICO and other providers. And they have no obligation to show you the score they used to judge your creditworthiness.

Scoring Tiers

Lenders usually divide credit scores into tiers, or categories. It might be a simple five-step one such as Excellent, Good, Fair, Poor, and Bad. In recent analyses of consumer credit behavior, Experian has been using these tiers: Super Prime (740+), Prime (680-739), Nonprime (620-679), Subprime (550-619), and Deep Subprime (under 550). The average score of all borrowers in mid-2014 was 681, which is pretty darn good.

Different providers may divide categories at different places. For instance, a score of 680 might be considered Prime in one system and Nonprime in another.

Lenders can make whatever tiers they want according to their own business needs. For car companies offering financing, the amount of your down payment can significantly change the tier they put you in.

And the tier you land in can make a huge difference in the annual percentage rate you'll pay. In 2015, people in the highest tier were paying less than 3 percent on new-car loans. Subprime borrowers were paying, on average, more than 13 percent.

But the score you get with your credit reports is only a rough guide to how creditworthy you are to lenders. They make decisions on whether to approve a loan, how much to lend you, and at what interest rate based solely on their needs. And they may consider all sorts of factors, such as your income and work history, that credit bureaus don't even track.

You could have perfectly good credit score to buy a car and some bank might turn you down if it doesn't need borrowers with your score right now. But you could have lousy credit and still get a loan if the lender wants to make more subprime loans.

What many people don't realize is that getting turned down for a loan doesn't hurt your credit score. The credit-reporting agencies only track the applications you make, not the results.

Lenders' 'Secret' Scores

When lenders make various kinds of loans, such as auto loans or home mortgages, they often use scoring models adapted for the purpose, which produce different scores from those you obtain yourself from the credit bureaus. In the auto-loan area there are, for instance, scoring models called "auto-enhanced" or "auto-industry" variants. They're based on formulas that give more weight to your past behavior specifically with auto financing.

If you've made late payments or defaulted on a car loan, it will ding your credit score for car buying more than otherwise. Similarly, if you've been really good with auto payments, your credit score to buy a car could be higher than one used by a credit card issuer. An auto lender might not care, for instance, that you're chronically late with your Visa bill as long as you pay your car loan on time every time.

What's vexing to many consumers, however, is that they have no legal right to see that "auto-adjusted" loan score. That puts consumers at somewhat of a disadvantage. If the credit score to buy a car is wildly different from a regular FICO score, consumers can't learn why or do anything about it.

However, if you've had a positive auto-loan history, it's safe to assume that your credit score to buy a car will reflect it. The reverse is also true. If you discover that your credit-bureau report shows negative information about your prior auto-loan performance that isn't true, you should contest that information, both with the credit bureau and with whatever creditor is bad-mouthing you.

Some experts have argued, with some justification, that it's pointless to get your scores from the credit agencies because lenders don't have to use them to make a loan. They'll either lend you money or they won't.

But we think that getting your easily available credit reports and scores is still useful. It will tell you where you fall generally on the credit spectrum, and may prod you to fix any errors you find. If the information is accurate, most of the time the credit-bureau scores run fairly parallel with lenders' secret scores.

Improving Your Credit Score

Here are some tips for keeping your credit record healthy:

  • Sign up for automatic payments from your checking account so that at least the minimum payment is made each month.
  • Don't max out on credit cards. Try to keep your balance no higher than 20 percent of the card's limit.
  • Don't close credit card accounts you aren't using. Unused credit is good for your long-term record.
  • Get your credit reports and challenge any misinformation you find.
  • If you want auto-loan providers to see you in the best light, never miss a car payment.

Best Financing Options

Make sure you Blue Rhino Motors at 818-485-0140 for all your financing needs. 

Great read from Autodealermonthly.com about the automotive buy here pay here program.

Finance Office

Enter The Buy Here Pay Here Industry With Minimal Headaches

March 2007, Auto Dealer Today - WebXclusive

by Jennifer Murphy Bloodworth Also by this author

The life of the Buy Here Pay Here (BHPH) dealer is not an easy one, but it is a profitable one if standards are set within the business and everyone follows them.  The best results are often achieved by those with a very structured business model. In this business set policies and procedures are a requirement because inconsistent underwriting and collection procedures are detrimental to your success.

In the BHPH business the credit-challenged customer is your lifeblood.  Most customers who walk on your lot know their credit is less-than-perfect.  Some simply need transportation, while others want a vehicle and need a credit makeover.  Customers you might not look at twice on a franchise lot will be your best paying customers on a BHPH lot.  The majority of these customers are honest people that aren’t afraid to work hard. 

Getting Started:  Building a BHPH operation

When opening a lot, several things need to be considered.  Location, personnel, training, procedures, necessary forms, inventory, advertising and much more are on the to-do list.  If you’ve been around the BHPH block before, you can probably open an operation without too much assistance as long as you have a large quantity of cash for inventory.  But if you’re new to this profitable niche of the automotive industry, you might need a “business in a box” solution. CarBiz, based in Sarasota, Fla., offers dealers a BHPH business model that is about as close as it gets.  

Their Dealer Controlled Financing (DCF) business model provides all the necessary tools to start a BHPH operation from the ground up.  After attending training classes, almost any business-minded person with sufficient capital can open up a lot; no prior in-depth BHPH knowledge is required.  The capital required to start-up this program is just under $11,000 plus inventory cost.

After signing up for this service, dealers receive a turnkey start-up package that includes:

  • DCF license
  • A policies and procedures manual
  • Management System Plus software (designed specifically for BHPH operations)
  • An on-site visit from a consultant
  • Unlimited over-the-phone consulting
  • Unlimited attendance to manager training classes
  • Forms necessary to start a BHPH lot (more can be ordered as needed)
  • Two on-lot training manuals
  • A popcorn machine
  • A soda cooler

Once the start-up of your operation is complete, active DCF dealer status can be maintained for roughly $200 per month.  This status entitles a dealer to a monthly composite of operational data, continued over-the-phone consulting and the ability to continue attending ongoing training classes.



The Go-To Guide: A Thorough Policies and Procedures Manual

In any BHPH operation, set practices must be in place for consistency and accountability.  A written manual that outlines all policies and procedures is the key to success (and fewer headaches).  A complete policy and procedures manual should cover inventory, sales, operations, and collections.

Jeff Shafer, vice president of Afford-A-Car, testified to the completeness of the DCF policy manual, “The thoroughness of the policy and procedural manual is unprecedented… It’s written very simple, so basically all you’ve got to do is be able to read and you can run a store.” 

Al Jenkins, general manager of Instant Auto Credit, has used this program since 1993 and believes the policies and procedures manual should be followed just as it’s written.  According to him, “If you try to stray from the basics, that’s when you normally run into problems… Every time we stray a little bit, we find that when we go back to the basics, we’re more successful.” 

Another profitable operation is in Pennsylvania.  Sellersville Charge-A-Car Vice President Tom Brandis as been using this model since 1992 and runs two BHPH lots.  “The policies keep the employees in line.  I don’t allow them to deviate too much without making a phone call to me.”

Yardstick for Improvement

Whether you are a member of a twenty group or purchase reports on your industry, its good practice to measure your performance and to know where your business is lacking and/or thriving.  One major advantage of being an active DCF dealer is that you receive monthly composites which allow you to analyze your performance by comparing your performance to other DCF lots and benchmarks.  The electronic composite consists of four pages.

Page 1 – Sales – This page includes year-to-date and month-to-date figures on retail finance, retail cash and wholesale.  Another section includes figures to compare your results to other active DCF dealers.  Aside from this data there are three bar graphs.  The first graph, “Units Financed,” shows the number of units your lot financed for the month and how many units the top 10 DCF dealers financed.  The second graph, “Average ROR,” shows your rate-of-return percentage compared to the top 10 dealers’ RORs.  On these graphs, the top 10 are identified by number, not name, so the names of dealers aren’t disclosed.  The third graph, “Retailed Financed Sales,” displays your monthly sales totals for the past two years.

Page 2 – Assets – This page includes accounts receivables balances, inventory, delinquency and the comparison to the average, median, minimum and maximum figures for active DCF accounts.  Graphs are also included to compare your figures to the top 10 dealers.

Page 3 – Bottom Line – This page includes information on bank deposits, profit and loss, and year-to-date charge off analysis.  Also included are the figures to compare your results to other active dealers.  Two of the graphs compare you to the top 10 dealers, while the remaining two graphs include the dealer average, minimum and maximum figures alongside yours for comparison.

Page 4 – Graphs – This page consists of eight graphs including information about the past month.  They all compare your figures to average, minimum and maximum dealer numbers.  The graphs are:

Average Selling price 
Average Gross Profit 
Average Rate-Of-Return 
Average Cash-In-Deal 
Average Cash Down 
Average Contract length 
First Run Delinquency 
Monthly Collection Rate

When You’re Ready to Grow

After establishing their first BHPH operation, dealers often see the potential for a second operation, but choosing the location can be difficult.  The active DCF dealer will be assisted in location selection, generally 10 to 15 miles from the original location.  There is another start up fee for an additional lot of $7,500.  Other BHPH dealers feel that the distance is not as important as the control factor of the operation, opting to open lots as far away as 75 to 100 miles from the original location.

Afford-A-Car in the Dayton, Ohio, area has opened four additional locations since opening their first lot in 1992.  Each store follows the same structure which allows for consistency throughout the organization.

Tips for the Hands-off Dealer

Although the majority of BHPH dealers are not hands-off dealers, it is possible to run multiple locations with minimal headaches if you hire a general manager to keep tabs on how your business is running.  Another option is to hire a consultant to help you keep watch over your performance, or if you are a CarBiz client you can subscribe to an Additional Consulting Package (ACP). Michael Downey, software technology manager at CarBiz, said, “[ACP] is what we like to call our ‘Watchdog’ service, which is really geared toward an off-site owner who wants that third party to see how the operation is going.”  With this service, the owner and managers receive weekly phone calls and three onsite visits a year to help analyze how the business is running. 

Jenkins of Instant Auto Credit utilizes the Additional Consulting Package, which costs $1,000 per month.  He performs spot checks at the three lots throughout the week, but he said, “By having all their programs and guidelines in effect, I don’t have to manage the stores as closely…following the programs and their weekly calls frees me up to be doing other things.” 

Exceptions Can Be Made

Every dealer agrees that the best advice is to adhere to set practices, but understand that exceptions have to be made sometimes. Not every customer will fit into the underwriting guidelines you have defined.  If you never make exceptions you will lower your risk, but you may miss some good paying, loyal customers along the way. So, each customer must be viewed individually.

It is among these possible exceptions that many dealerships tend to get off track.  An exception maker must be designated.  If every sales associate has the ability to make exceptions, a dealer is likely to wind up with inconsistent buying, adversely impacting the portfolio performance.  If after a sales associate has checked off all required items and a potential customer doesn’t meet every requirement on the underwriting list, but the associate believes an exception could be made, an exception maker is called to review the deal and make a decision.  This way, the same person or small group of people is looking at all questionable deals and making all the decisions. 

Afford-A-Car in Ohio has a management office to manage all five of their lots, and all individuals designated as exception makers work out of that office.  This design allows them to manage effectively without any additional consulting.   The key is underwriting control by a few approved decision, or exception, makers.

Successful BHPH operations, regardless of the number of locations, all seem to have common traits – committed dealers who set policies and procedures and follow them without fail.   The most successful also continually measure their performance against their peers to improve their own performance.

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