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CREDIT REPORTS

Consumer Car Loans Reach Record Lengths

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Hyundai Sonata

New car loan terms are longer than ever before.

Earlier this month, Experian Automotive announced that the average length of both used and new car loans had increased by one month to 62 and 67 months, respectively. These loan term averages are at record levels, but consumers are eagerly embracing the extended loan terms.

Indeed, Experian noted that 29.5 percent of all new car loans are for 73 to 84 months, representing an 18.6 percent year-over-year increase against the first quarter of 2014. Moreover, used car loans for the same lengthened term and period were up by 14.2 percent, representing 16 percent of all such loans.

Negative Equity Implications

Despite the increasing shift to longer term car loans, Experian’s senior director of automotive finance, Melinda Zabritski, downplayed worries that such loans might have an adverse affect on consumers. “Most longer-term loans help consumers keep monthly payments manageable, while allowing them to purchase the vehicles they need without having to break the bank. However, it is critical for consumers to understand that if they take a long-term loan, they need to keep the car longer or could face negative equity should they choose to trade it in after only a few years,” explained Zabritski.

Experian noted that the average amount financed for new car loans has also set a record. In the first quarter of 2014, consumers financed an average of $27,612. But that amount rose by $1,099 to $28,711 one year later. Monthly payments increased too, rising from $474 to $488.

As a point of comparison, used car debt is coming in lower, at least $10,000 below new car indebtedness. However, those obligation levels are on the rise, increasing from $17,929 to $18,213. Furthermore, the median interest rate for used car loans was 9.17 percent compared to 4.71 percent for new car loans.

GMC Sierra Denali

Longer loan terms mean affording trucks such as this GMC Sierra Denali.

Consumers with excellent credit routinely qualify for the best loan terms. To be sure, those low teaser rates offered by the car manufacturer’s financing arms are reserved only for people with the highest credit scores.

And with an average credit score of 713 for the new car loans financed during the first quarter of this year, that number is about 100 points lower than consumers with excellent credit, underscoring the higher average interest rate. Used car loan borrowers came in even lower, with a median 643 credit score. That’s not far above the 620 credit score that some consider subprime.

Underwater and Sinking Fast

Not everyone is convinced that the trend to longer loan terms is a good one.

For instance, Paul Kirkbride, SVP of CU Solutions at CU Direct noted that there are certain financial implications consumers should keep in mind. Specifically, they may find themselves underwater (i.e., owing more on their car than what it is worth) as vehicles depreciate an average of 13 percent annually according to NADA.

Said Kirkbride, “If a borrower didn’t make a down payment and selected a longer term, the risk is the borrower will possibly need to roll negative equity from one car loan into another when they trade in the car, or worse, should the borrower need to sell the car, they’ll have to come up with the difference to pay off the loan.”

He also pointed out that credit unions typically work with people who have the financial means and creditworthiness to afford such loans. Such consumers usually choose the extended loans for convenience purposes.

2013 Buick Encore

Interest rates for late model used cars average above 9 percent.

Looming and Costly Repair Costs

Ed Snyder, President of Oaktree Financial Advisors foresees a problem that consumers may overlook. In particular, he points out that repair costs tend to mount as a car ages.

“If you take a longer loan, like 72 months, you are going to rack up some miles by the time your loan is paid off. If you average 15,000 miles per year you’ll be closing in on 90,000 miles – and that’s on a new car. If you buy a used car you’d have even more miles on it at that point. This is certainly at the mileage and age where your car could need some expensive repairs. It could easily need some work on the air conditioning or new tires or other repairs. You’ll have to foot that bill on top of the car payment that you still have,” said Snyder.

The longer term new and used car loans may eventually have an adverse impact on new car sales down the line as well. Said Snyder, “These longer loan lengths could end up meaning fewer cars sold in the future as people are forced to hang onto their cars longer since they are still paying on them.”

Credit and Car Loans

Astute consumers can and should keep tabs on their credit by obtaining copies of their three credit reports. Those reports, assembled by Trans Union, Experian and Equifax are available for free once annually at AnnualCreditReport.com. Information in these reports can affect credit scores, a three-digit number that is sold separately.

Shopping around for a car loan, putting more money down and choosing a shorter loan length can reduce your monthly payments as well as curtail your overall costs. Explore your options before committing to a car loan that you may have for the next six, seven or eight years.

How Are Insurance Scores Determined?

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If you have not heard of your insurance score, you are not alone. An insurance score, like a credit score, is based on information derived from your credit reports. Insurance companies have found that there is a correlation between the way you handle your credit and future accidents as well as your likely insurance claims. Although credit reports are used to establish both credit scores and insurance scores, there are also some important differences.

what is your insurance scoreYour credit score is based largely on your ability to repay what you have borrowed. Your insurance score goes beyond your credit report to look at the behavior of policyholders with similar credit temperament who have filed claims with the insurer. You should know that insurers set their own insurance scores, consequently, your score will vary from company to company.

A credit score, such as one from FICO, is used by 90 percent of US lenders. That score is based on five factors: your payment history, the amount of your debt, the length of your credit history, new credit and the types of credit. Loan approval and terms are based on your credit score.

Your insurance score will also look at the same factors, although your insurer likely isn’t interested in your income information or job history, criteria that banks and other lenders look at when deciding whether to extend credit to you or not. Even so, the better your credit score the higher your insurance score.

Insurance Score Determination

Auto Trends reached out to the insurance industry to glean more information about insurance scores. Kristofer R. Kirchen, president of Advanced Insurance Managers, LLC, in Tampa, Florida, directed us to the National Association of Insurance Commissioners (NAIC) website to learn how scores are determined.

Credit-based insurance scores are nothing new, arriving on the scene in the early 1990s. According to FICO, some 95 percent of auto insurers and 85 percent of homeowner insurers use credit-based scores. However, not all states allow credit-based scores, thus it is important for consumers to check with their state insurance department to learn what their state permits.

insurance scoreYou should also know that insurance companies may only consider your credit-based insurance score as “one factor in its underwriting process” according to the NAIC. If you are seeking coverage for a vehicle, the insurer will consider the make, model and age of your car as well as the age of the drivers, the miles driven annually and your zip code. Yes, you can ask your insurer if an insurance score was factored to underwrite and rate your policy. You should also ask your insurer what risk category you were placed in after your quote was received.

Obtain Your Score and Improve It

Kirchen noted that CreditKarma.com provides both your credit score and your insurance score for free. You need to register with that website, by providing an email address and a password to track that information. This writer has been using Credit Karma and found his insurance score by clicking on the “view all my scores” button. In this case two scores were presented: an auto insurance score and a home insurance score with only a small numerical difference between the two.

If your insurance score is low you can improve it the same way you can raise your credit score: by using your credit wisely, paying your bills on time and reducing your debt. Kirchen also advises consumers to clean up collection activity as found in their credit reports. You can obtain one free copy annually of all three of your credit reports by visiting AnnualCreditReport.com.

Now About That Claim

It is important for you to know that placing a call to your insurance company to report an incident when there is no damage to either vehicle should always be avoided. That call will show up on your claims history even though no pay out was made noted Glenn Jacobs of the Jacobs Agency in Knoxville, Tennessee. Your insurance score will suffer and as a consequence, you may be charged a higher rate for auto insurance.

See Also — Your Insurance Score and Insurance Premiums

Your Insurance Score and Insurance Premiums

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Every consumer has a credit score, a three-digit number that is based on your credit history and behavior. That number can have a profound impact on the way that you live as mortgages, personal loans and even apartments and a new job may depend on your score. The higher your credit score, the more likely creditors, landlords and hiring personnel will view you more favorably.

Insurance Score

Smashed BMW.
Your claim history affects your insurance score.
The insurance industry values your credit score too, but it is only part of a larger or more comprehensive measuring tool. That tool is your insurance score, a number that few people outside of the insurance industry are aware of.

The Insurance Information Institute describes an insurance score as “a numerical ranking based on a person’s credit history.” These scores help insurers assess risk and are also considered “a good predictor of insurance claims.”

An insurance score is based on actuarial studies that indicate whether a person is more likely to file a claim or not. Consumers with a lower insurance score are more likely to file a claim and will, therefore, be charged higher premiums.

Credit Bureaus

As you might guess there is a parallel between credit scores and insurance scores. The former is used to predict credit delinquency, the latter is for predicting insurance losses. Both scoring methods are based on information gleaned from your three credit reports, data that is collected by the three credit reporting bureaus: Experian, Equifax and TransUnion.

One problem here is that some consumers may have very little credit, choosing to pay cash for their purchases. Employing wise money management may cost you financially as a lower credit score can result in higher auto and homeowners premiums, with no consideration given to what your earn. This isn’t fair, of course, but we do live in a world of credit.

Insurance Scores

Just as credit scores serve up a three-digit number, your insurance score does the same thing. That scoring range extends from 200 to 997, with 776 on up representing a good score. Scores of 500 or below put you in the poor score range with both your car insurance and your homeowners insurance premiums most likely coming in double reports the New York Times.

Insurers have another way of calculating risk. Two databases contain claim information: the Comprehensive Loss Underwriting Exchange (CLUE) and the Automated Property Loss Underwriting System (A-PLUS). Anything that insurers want to know about your claim history can be easily found.

Reporting Errors

With your credit reports playing such a significant role in determining two very important scores, the information found in each report should be correct, right? Unfortunately, facts tell us otherwise.

The Federal Trade Commission in a December 2012 report to Congress found that 26 percent of the 1,001 participants in an FTC study reported finding errors in at least one of their credit reports. These consumers reviewed 2,968 credit reports with 19 percent or 572 reports disputed.

Of the reports disputed, 399 had a modification made by the respective credit reporting bureau with 195 consumers reporting a credit score increase following the adjustment. Of the 195, two thirds reported an increase of 10 points or more — what might seem like a small number, but one that could have far reaching consequences for some insurance shopping consumers.

Reports and Scores

By law, consumers are entitled to receive one free copy of each credit report annually. Your free reports are available at AnnualCreditReport.com, a website that was set up by TransUnion, Equifax and Experian. Obtain copies of all three reports and if errors are found, following the reporting bureau’s instructions on how to file a dispute.

You can also obtain your credit score for a fee. A visit to MyFico.com will give you that score.

What about your insurance score? Is that information available to consumers too? Yes it it is. If you visit the Lexis Nexis site, you can obtain separate home insurance and auto insurance scores. Moreover, you can also obtain free CLUE reports that offer a seven-year history of the losses associated with your personal property or automobiles.

See Also — How to Dispute an Auto Insurance Claim Pay Out

The Average Length of a New Car Loan

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loans

Have you been shopping for a new car lately? If so, you most likely will finance your purchase as the average price of a new car is just above $30,000. Banks, credit unions, manufacturers’ financing arms and other lenders want your business. To get you behind the wheel of a new car, loan terms have been extended to help you afford your monthly payments.

Loan Length

As of March 2012, the average length of a new car loan was 64 months reports Experian, an information services company. That represents five years and four months of car payments. In comparison, used car loans were averaging 59 months or just one month short of five years.

New Loans

Auto loans are typically written for 36, 48 or 60 months. Some lenders offer 72- and 84-month new car loans.

Be mindful that the published rate for new car loans is for people who have outstanding credit. For recent college graduates, that rate may not be attainable and may result in much different loan terms. Car shoppers should also pull their credit reports before buying a car, reviewing all three reports carefully to ensure that correct data is shown. Experian, Equifax and TransUnion are the three credit reporting bureaus — you can get a free copy of each report once annually by visiting the AnnualCreditReport.com website. Notify the respective credit bureau directly if you find a mistake — errors can lower your credit score, resulting in a higher interest rate for a new car loan.

Your Options

Clearly, there are a number of lenders and types of lenders that would like to finance your new car. Many new car dealer offers come with low- or zero-rate financing, or you can choose a rebate to apply to your down payment. Your dilemma may be trying to figure out what the best deal is for you.

The best option may be to shop for a new car loan first and use that loan to finance your vehicle. Credit unions typically offer the lowest rates, sometimes as low as 2 percent for a new car loan. With terms for up to 7 years, you may be able to qualify for a loan, visit your new car dealer, negotiate the best price on your new car, apply the rebate and use the loan. With this option you get a loan rate comparable to what the manufacturer’s lending arm (i.e., Ford Credit, GM Financial, Infiniti Financing, et al) and you still get a hefty rebate. You may also be eligible for additional rebates too if you are a recent college graduate, a military veteran or are a loyal customer.

Upside Down

One important factor consumers should consider before signing an agreement for a longer length car loan is the value of their car in relation to the amount owed on the loan. If your down payment is especially small — say 5 or 10 percent — and your loan term is 6 years or longer, you may owe more on your car than what it is worth.

This means that your loan is upside down, a factor that can cause you substantial financial harm if you should get in an accident and your vehicle is declared a total loss. Your insurer will assign a value to your totaled car, minus the deductible, and pay your lender that amount. There most likely will be a loan deficiency, one where you owe thousands of dollars to your lender for the difference between what your insurer pays and your loan balance.

You can avoid ever being upside down with your auto loan by making a larger down payment and electing for a shorter loan, one that is for 60 months or shorter. If you want the longer term, then you need to come up with an even larger down payment to avoid the upside down effect. You should also avoid financing the taxes and fees advises Niles Howard, writing for Bankrate.com, costs that you will want to pay separately.

How To Obtain a Bad Credit Car Loan

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If your credit is bad, then it may seem that a new or use car loan is not within your reach. After all, when credit was tightened following the 2008 financial crisis, lenders began to avoid writing loans to people with bad credit. The good news is that credit has loosened in recent years and a host of lenders may be willing to extend a loan to you. If you have a steady source of income and the ability to make payments, you may be able to secure a loan for a new or used car.

1. Know how your credit measures up.

bad credit car loanYou may think that you have bad credit, but you should confirm this first. The three major credit bureaus — TransUnion, Experian and Equifax — keep records about your credit, information that isn’t always correct. Collectively, these companies manage a AnnualCreditReport.com, a website that entitles you to obtain your credit reports once annually for free. Order your reports for your review through this website only.

2. Review your credit history.

Mistakes or information that is outdated on your report can lower your score. According to the Federal Reserve, stale-account errors are common and can adversely impact your credit. Fix these problems first by following each company’s instructions on how to have your credit reports updated. Bureaus have 30 business days to update their records, otherwise the information must be removed from your credit report. A corrected credit report will be issued at no charge to you.

3. Know your credit score.

Once the credit bureaus have updated their records, you should retrieve your credit score. This three-digit score can be purchased from MyFico.com or you can visit CreditKarma.com to obtain your TransRisk score for free, a number that is similar to other scores used by creditors. A credit score of at least 700 points “reflects good credit management,” according to Experian. A score that is below 600 can put you in sub-prime lending or bad credit category, with only select lenders available to write a loan.

4. Apply for credit.

Visit your bank or credit loan and speak to a lending officer about a new car or used car loan. Find out how much you can borrow and what the terms the car loan will be. If you are turned down for credit, apply for loans elsewhere. Multiple credit requests within a month’s time are treated as one request and will affect your credit score only slightly. You can find lenders that specialize in helping bad credit borrowers by searching Google for “bad credit car loans” and checking the results. Car dealers may also be willing to arrange financing for you too.

Credit Considerations

Consumers with bad credit can obtain a car loan and usually without a co-signer. If someone agrees to co-sign your loan, it won’t help your credit, but a loan you take out on your own and pay back on time most certainly can.

How to Get a Bad Credit Car Loan

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If you want something badly enough, such as a bad credit car loan, you can usually get it. That can be a good thing. Then again, it can also be a bad thing. It depends on what you want as well as what you need.

Let’s face it: many of us need a car. With more than 250 million registered passenger vehicles in the U.S., car ownership for people of driving age goes beyond being a mere privilege. It becomes a conveyance of survival for many of us.

Bad Credit Car Loan

money funnelBuying a car means taking out a loan unless you’re blessed with thousands of dollars of spare money to pay for a new or used vehicle. Very few people can pay cash for a new car and with used car prices costing a mint, even most late model used cars are financed too. If your credit is good, then you should be able to get a loan. If your credit is bad, don’t fret: there is usually a lender willing to extend to you a bad credit car loan, but for a price. Read on to learn how you can avoid getting ripped off.

1. Check your credit score.

Your credit is bad, but just how bad is it? How do you know for certain? Well, the main thing you’ll want to know is that lenders will be looking at a three-digit number representing your credit score. If that score is low, say at 598 or below, then you’re in sub-prime territory or what is known as a “bad credit” score. You can obtain your credit score through MyFico.com. If your score is below 700, then repairs may be in order. If it is below 600, then you’ll need to pay careful attention to the next several steps as you shop for a bad credit car loan.

2. Obtain your credit reports.

Three credit reporting companies have dossiers on you. Specifically, credit information on who you are, where you work, how much money you owe lenders, whether you make your payments on time or not, and other information. Those credit reports are produced by three credit reporting bureaus: TransUnion, Equifax and Experian. Each company, by law, is required to give you one free copy annually of your credit reports. The FTC mandates this, but you can only obtain your free copies by visiting AnnualCreditReport.com for that information; otherwise you’ll pay for them. Head over to that site, put in your information and obtain your free reports.

3. Review your credit reports.

You’ve done so well following what I’ve said so far, but don’t lose focus now. That’s because you’re going to need to *very carefully* read all three credit reports and look at the information the credit bureaus have on file about you. Guess what? There is a good chance that some of that information is not correct. Guess what again? Incorrect information can lower your credit score. What to look for: wrong addresses, outdated job information, paid off debt that shows balances outstanding, accounts supposedly belonging to you that don’t, and more. You’ll need to contact each bureau individually to point out their mistakes, a move that will trigger an audit on their part. With 30 days to respond, the credit bureau can fix your mistake or contest your findings. If they choose to do neither then that information must be removed from your report automatically.

4. Apply for a car loan.

Wait 60 days after notifying the credit bureaus of possible mistakes or disputes before applying for credit. This will allow your updated information to be processed and should raise your credit score accordingly. Good places to apply for a car loan include your bank or credit union. Fill out your car loan application and give it to a lending officer.

5. Consider alternative financing sources.

If your bank or credit union turns down your car loan because of bad credit or the double-digit interest rate seems too high, then you’ll need to look for alternative places to apply for a car loan. If you make multiple loan applications within a month, it will only count as one inquiry by the credit bureaus. Still, you don’t want to waste your time with too many lenders so seek out companies that specialize in bad credit car loans. We don’t endorse any particular lender, but Drive Time, BlueSky Auto Finance, Federal Auto Loan and Fidelity Auto Loan are among the lenders that provide bad credit car loans and other financing. Choose one, make application, and if approved, make sure you understand the terms of the loan before signing your contract.

Lending Cautions

Bad credit means a few things: you’ll have a more difficult time obtaining a car loan and the interest rate you’ll be charged will be higher than what someone with good credit receives. You can reduce your monthly payments by putting down a larger down payment. Also, if someone is willing to cosign you loan, you may be able to avoid a high interest rate loan completely. With a co-signer on your loan, that person assumes risk if you default and your car is repossessed.

See Also — How To Obtain a Bad Credit Car Loan