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How Lenders Decide on Auto Loan Requests

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Florida is deemed as one of the worse states for credit, thanks in part to low credit scores. As a resident of Miami, you probably assume that lenders in your state refuse many people auto loans based on this alone. While it is true that the credit score is a major consideration when deciding on auto loan requests, it isn’t the only thing creditors use as basis for either loan approval or denial.

According to Mitchell Weiss, all lenders decide on loan requests based on 5 C’s. If you are applying or about to apply for an auto loan, you should learn about these 5 C’s by reading on below.

Capital – This one refers to one’s financial worth. Lenders gauge this by knowing what you own and what you owe, and figuring out the difference. They usually favor individuals who own more than they owe.

Capacity – This consideration refers specifically to one’s capacity to handle more debt. Lenders already know what you owe based on Capital, and they want to know if you can manage owing even more. Before they grant you an auto loan, they need to make sure you can deal with another financial responsibility.

How do lenders measure a potential borrower’s capacity? They divide the sum total of the individual’s monthly obligations by the salary he or she earns per month. The result stands for debt load, and if yours reaches 30 percent, creditors will be less willing to lend.

This, as well as Capital, are what lenders take into consideration when deciding the amount of the auto loan to be approved.

Conditions – This refers to both personal and non-personal circumstances. Lenders want to assess your own situation in the light of other things beyond your control (i.e., economic conditions). For example, creditors will evaluate how secure your job is and how you will continue earning money should you lose your job. Note that lenders aren’t just concerned with the now—they are also thinking of the future. Because auto loans take a couple of years to pay off, lenders need to think long-term. They want to be sure you can repay them now and later on.

Collateral – This refers to the item that will be financed, namely the vehicle. Just like with Conditions, lenders zero in on the now and later—they decide based on the collateral’s current market value and what its market value will be in the future. They need to know how much the vehicle will be worth a few years down the line, just in case you default the loan.

Character – This refers to how you have conducted yourself in terms of your financial life, as reflected in your credit report. Do you have too many or too few outstanding loans? Do you settle your bills on time or do you often miss payments? When you use your credit cards, do you pay the owed amount in full or do you carry balances? Your credit report contains the answers to these questions, and these answers become a factor in the lender’s decision-making process.

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