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Credit Score + Auto Loan

How that triple-digit number affects your new car buy

by James M. Flammang
DriveSmart - Buying - autoMedia.com

Several numbers are important to anyone seeking a car loan or trying to qualify for a lease. Lenders will ask for your birth date, Social Security number, and income. But no figure is more crucial than your credit score. A strong score means you're likely to get a loan on the vehicle you want. A low credit score means you're probably out of luck for financing a new car, and might have trouble borrowing to buy a used car, too.

As seen regularly on those TV commercials that offer "free" credit reports, credit histories and scores are available from three rating organizations: Experian, Equifax, and TransUnion. Four major credit-rating schemes are used: FICO, Vantage, Scorex Plus, and ScorePower.

Though it's not the only factor used to determine whether to grant credit to a given applicant, lenders rely on at least one of those scores. Those who use credit wisely—no late payments, no bankruptcies, no foreclosures—earn a high three-digit number. Low numbers go to persons with troubled histories. Depending on the rating company, the actual number may differ; but each one seeks to categorize people into prime customers, non- or subprime folks, and those who are not creditworthy. Vantage scores, for example, reach from 501 to 990. Others use a different range.

Prime Categories

Melinda Zabritski, director of automotive credit for Experian Automotive, ranks credit-users in five distinct categories: Super Prime (the best), Prime, Nonprime, Subprime, and Deep Subprime. Speaking at the Automotive Economic Forecast and Financial Forum in Chicago, hosted by the publishers of Auto Remarketing magazine, Zabritski noted that average credit "scores have gotten tight," so a higher figure is needed to qualify for a given loan amount. Early in 2010, the average score for a new-vehicle buyer (by Experian's reckoning) was 776, versus 665 for used-vehicle customers.

Despite the continuing economic turmoil, a majority of prospective car-buyers score reasonably well. Looking at all open auto loans, Experian found that 37.8 percent had qualified as Super Prime, and 24.1 percent as Prime. Nonprime persons totaled 15 percent, and Subprime 8.6 percent. The Deep Subprime total was down slightly, but still a distressing 14.5 percent. Those are the folks least likely to be granted a loan of any kind.

Among buyers who financed either new or used vehicles in the first quarter of 2010, almost 47 percent were Super Prime. Prime, Nonprime, and Subprime applicants totaled just over 12 percent each. Deep Prime accounted for 16.6 percent, Zabritski said. Of brand-new vehicles financed, 83 percent went to Prime or Super Prime applicants. Only 5.7 percent of new cars wound up in the hands of Deep Subprime folks, whereas that group financed more than 24 percent of the used vehicles.

Score and Interest Rate

Credit rankings don't affect monthly payments much, but they make a big difference in the finance rate you'll pay. The average rate paid on a new vehicle by a Super Prime customer early in 2010 was 4.38 percent, according to Experian, escalating to 10.8 percent for Subprime buyers and 13.4 percent for Deep Prime–provided those customers could find financing at all. "It can be a fairly significant spread," said Steve Lambert, president of Nissan Motor Acceptance Corporation (NMAC): as little as 3 percent for a high-rated customer, to perhaps 13 percent for the "very credit-challenged."

The average amount financed by new-car buyers is above $25,000 for the top three categories, but just under $24,000 for Subprime customers and $21,900 for Deep Subprime. Used cars follow a similar pattern, from almost $18,000 for Super Prime buyers to under $12,000 for Deep Subprime.

Not so long ago, a customer could "almost go in and buy a car on a whim," Zabritski said. Today, it's tougher.

When Responsible Means Bad Risk

A high score doesn't guarantee acceptance, as one customer learned when she tried to lease a new car. Though she scored well into Super Prime territory, her initial application was rejected automatically by the automaker's "captive" financing arm. Why? Because she had no history of car loans—or any loans. That Super Prime credit score came almost solely from prudent use of credit cards, thus making her appear suspicious to the automated evaluation system. Considerable explanation by dealership employees was needed before her application was finally approved.

"Credit score is the primary driver," said NMAC vice-president Mike McConnell, but other factors enter the picture. Nissan employs a "rehash process," whereby dealers can call and talk with the credit team, to take a "close look" at an applicant who's been rejected by the automated system. At least 40 percent of applications for Nissan loans are handled solely via computer.

Until the economy improves significantly, applicants for credit need to expect close scrutiny and be prepared for rejection—especially if their credit histories contain a few flaws. TransUnion outlines several common-sense steps we can all take to keep our credit scores acceptable: Pay bills on time, always; keep credit-card balanced below 35 percent of the available limit; check your credit reports regularly, and get any inaccuracies corrected; avoid excessive inquiries. Credit-reporting agencies take numerous inquiries as a bad sign, so don't apply for new credit unnecessarily.