These terms will help you effectively communicate with your loan counselor and provide a better understanding of the loan process.
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Co-Buyer Co-Signer Credit Bureau Credit Report Credit Score Applied for Credit
Installment Credit
Open Credit
Unapplied for Credit
Charge-Off
Judgements
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Credit Scoring Debt Ratio Loan to Value Minimum Down Payment Cash
Trade Equity
Negative Equity
Rebate
Dealer Rebate
Deficiency Balance
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Payment to Income Repossession Stipulations Proof of Income
W2 Income
Self Employment
Child Support
Social Security
Unreported Income
Proof of Address
Telephone Bill
Mortgage Statement
Lease Agreement
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Co-Buyer
Unlike a Co-Signer a Co-Buyer's income is combined with the Buyer's. This option is normally limited to a spouse or a person closely related residing at the same residence.
Co-Signer
Someone who assumes legal responsibility for repayment of the automobile loan in the event the borrower does not pay. A Cosigner may be considered for a Buyer who does not comply with all the credit requirements. The income of the Buyer, however, must meet all the income and budget guidelines without reliance upon the income of the cosigner.
Credit Bureau
An agency that compiles, maintains and provides credit and other personal information to creditors. There are three major credit reporting agencies:
Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
Phone: (800)-685-1111
Trans Union
P.O. Box 1000
Chester, PA 19022
Phone: (800) 916-8800
Experian (formerly TRW)
P.O. Box 2002
Allen, TX 75013
Phone: (888) 397-3742
P.O. Box 740241
Atlanta, GA 30374-0241
Phone: (800)-685-1111
Trans Union
P.O. Box 1000
Chester, PA 19022
Phone: (800) 916-8800
Experian (formerly TRW)
P.O. Box 2002
Allen, TX 75013
Phone: (888) 397-3742
Credit Report
A historical document that may include payment habits, number of credit or loan accounts, balance of those accounts, place and length of employment, and records of financial transactions. The following items normally appear within the credit report.
Credit Score - A statistical formula that assigns a numerical value to your credit worthiness. There are many different score models. When you apply for an auto loan the lender is most likely viewing your "Car Enhanced Score". This score may be higher or lower than your regular credit score. Scores can vary widely among all three credit bureaus.
Applied for Credit - Items on your credit report that you actually initiated the request for credit.
Charge Off / Write Off - Items that the original creditor has given up on trying to collect. Often these Charge Offs will show up twice on a credit report, once from the original creditor as Applied for Credit, and once from a collection agency as Unapplied for Credit.
Judgments - A court order to repay a debt. A creditor with a judgment in their favor may request a wage garnishment to repay the debt.
Applied for Credit - Items on your credit report that you actually initiated the request for credit.
Installment Credit - Loans that have a fixed monthly payment for a fixed period of time. These items are the most important items on your credit report when you apply for an auto loan. Examples include auto loan and mortgages.
Revolving Credit - Loans that do not have a fixed monthly payment nor a fixed period of time. Examples include credit cards and home equity lines of credit.
Open Credit - Loans that must be paid in full each month.
Unapplied for Credit - Items that you did not initiate a request for credit. These items only show up on your credit report if you don't pay them. Example include utility and medical bills, bad checks, and collection agency accounts.Revolving Credit - Loans that do not have a fixed monthly payment nor a fixed period of time. Examples include credit cards and home equity lines of credit.
Open Credit - Loans that must be paid in full each month.
Charge Off / Write Off - Items that the original creditor has given up on trying to collect. Often these Charge Offs will show up twice on a credit report, once from the original creditor as Applied for Credit, and once from a collection agency as Unapplied for Credit.
Judgments - A court order to repay a debt. A creditor with a judgment in their favor may request a wage garnishment to repay the debt.
Credit Scoring
A system used by banks and other lending institutions to determine whether or not you are creditworthy. Each lender uses their own score card to determine if they will approve an automobile loan. The following items are normally contained in a lender score card:
- Credit Report Score
- Time in Credit File
- Time on Job
- Monthly Income
- Debt to Income Ratio
- Payment to Income Ratio
- Loan to Value
How much you earn compared with how much you owe. The lower your debt ratio, the more disposable income you have.
You calculate it like this: Take the amount needed to repay debts each month, including rent or mortgage, and divide this by your gross pay (your pay before deduction of tax).
Loan to Value
The amount financed relative to the published book value of the vehicle. Lower LTV's have a better chance of approval. Lenders usually use Trade of Wholesale Value Book Value when calculating LTV.
Book Value - The published valuation of a vehicle. There are three nationally recognized vehicle valuation services.
Minimum Money Down - NADA
- Kelly Blue Book
- Black Book
Few lenders will approve an auto loan for someone with bad credit without money down. See our Car Loan Estimator for more details. Lenders vary on acceptable forms of down payment; a summary follows:
- Cash - Cash is always acceptable.
- Trade Equity - The difference between the value of your trade and the lien payoff. Trade equity is always acceptable as a down payment.
- Negative Trade Equity (Upside-Down) - The difference between the lien payoff and the value of your trade. Since this is a Negative Number it cannot be used as a down payment.
- Manufacture's Rebate - Some lenders do not allow rebates to meet their minimum required down payment. The rebate, however, is still used to reduce the finance amount.
- Dealer Rebate - Lenders do not allow dealer rebates to meet their minimum required down payment. The rebate, however, is still used to reduce the finance amount.
Your monthly car payment compared to your gross monthly income. Most lenders prefer this ratio to be less than 15%.
Repossession
When a creditor or lessor take possession of your vehicle after you default on your loan or lease. For credit rating purposes it does not matter if the repossession was voluntary or involuntary.
Deficiency Balance - A deficiency is any amount you still owe on your contract after your creditor or lessor sells the vehicle and applies the amount received to your unpaid obligation. This also applies to lease turn-ins with over mileage charges.
Stipulations
Documentation may be required to prove items on your initial bad credit car loan application.
- Proof of Income - Income is the SINGLE BIGGEST FACTOR in determining how much or what type of vehicle you can purchase. See our Car Loan Estimator for more details.
- W2 Income - This type of income is most important to a lender because it is attachable (it can be garnished). Acceptable POI includes
- Computerized pay stub with year to date calculations
- Four consecutive hanwritten pay stubs and previous years' W-2. Often, cancelled checks from the employer are required.
- Self Employment or 1099 - This type of income must be verified with tax returns prepared by a professional tax service. Lenders require two years tax returns. It is rare for a lender to approve a person with bad credit that has been self employed for less than two years.
- Lenders use a customer's adjusted gross income. That is the income net of all expenses. This can be found on Schedule C of a tax return, or line 31 of the 1040.
- Child Support - A copy of the court order and a recent check or check stub. Lenders may not count this type of income if will not last for the length of the car loan.
- Social Security - Form SSA 1099 and a bank statement showing deposits.
- Unreported Income - Income from cash jobs is not counted when calculating income.
- W2 Income - This type of income is most important to a lender because it is attachable (it can be garnished). Acceptable POI includes
- Proof of Address (POR) - Acceptable forms of POR include utility bills, credit card statements or anything received through the mail which contain the following:
- Customer's name
- Customer's address
- Dated within last 30 days
- Telephone Bill - Some lenders require proof of home phone service. Many lenders are now accepting cell phone service as well.
- Mortgage Statement - The most recent mortgage statement is used to verify your monthly mortgage obligation. This document also serves as POR.
- Lease Agreement - Used to verify your monthly obligation. Often the landlords phone number is required for verbal verification.
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