Credit Resources
Types of Personal Loans Car Loans Car Loans are currently about the easiest type of loan to be approved for. Programs for car loans are the most aggressive credit wise and among the most aggressively marketed due to the affiliation of auto manufacturers, auto dealers, and financial institutions. If you are trying to get a car loan from a major bank at one of their branch offices, it can be more difficult to get approved, take longer, and the rate may even be higher. At a Branch, either a loan officer makes the decision or a central area for the Branches makes the decision. Most banks also have an additional and separate Sales Finance Division of the, whose entire purpose it is to also make car loans. These Sales Finance Divisions are set up mostly to establish and promote a business relationship with many Car dealerships throughout the country which the branches don’t do. Due to the intense competition at dealerships, there is intense pressure to get people approved to make the sale. Each Dealership sales agent has dozens of financial institutions they can send a car loan request to, including the finance Divisions of the car manufacturers themselves, with whom it is easier to get approved and they often have better rates. Banks know this, so they have to match the credit standards and rates and endup offering lower rates than what the local branch of the same bank is offering. The result is that the credit criteria of the Sales Finance Division at a bank is easier to get approved from and the rates are often better than the rates of a branch office at the same bank! Many banks don’t like to re-finance car loans on 1 or 2 year old cars for the amount that will be required to pay off the loan where you have your car loan with now & they also don’t like to re-finance for as many months as you had remaining with the other company. Basically, they don’t like to “swap out” the loan. Therefore, make sure you are satisfied with the rate when you take out a car loan and don’t plan on re-financing your car loan. In the first part of the loan, the car depreciates the fastest and the loan balance goes down the slowest since most of the payment is interest. So after 1 or 2 years when you go to refinance, a car that you bought and financed for $20,000 now only has a book for $15,000 but your loan balance may still be$18,500. Finance companies call that “upside down”. They don’t want to finance something for $18,500 that now only has a retail value of $15,000. They may want you to come up with $3,500 in order to re-finance because they aren’t likely to make you an $18,500 loan on a car with a retail of $15,000. They also know that even if they finance your car loan at the current retail value, if you default, they will send the car to auction and only get around 50% of whatever you still owe on it. They know they are going to lose no matter what if you default, so they don’t want to risk more by financing you over the retail value. A sharp person will point out that after 1 or 2 years, lenders are “upside down” on every new car loan they’ve made. Meaning, had they financed you to begin with instead of another bank, that same car loan with a loan balance of $18,500 and a car retail value of $15,000 would have started off on their books instead of at another bank. So what’s the difference? Nothing, but they don’t see that opportunity. All they see is that you want to re-finance a loan they will have to finance for more than 100% of the car’s value to pay it out and they don’t like to do it. Once you have made a decision to go to your Bank’s branch office for a car loan, the Loan Officer is not showing you competitive or lower rates offered by GMAC, Ford Motor Credit, etc, like the Salesman at the Dealership is to his customers. So the banks process your loan with a higher rate and tighter credit standards. This part of the bank is known at the “Retail” part of the bank and it often has different criteria for personal loans and small business loans than other parts of the bank. Unsecured Loans These are among the most difficult to get. Better credit is required. Often, your personal credit score needs to be 680 or higher, and the higher the better. The Bank may have different criteria for Unsecured loans in different divisions within the bank. The amount you will get approved for depends greatly on your income. Some institutions will ask you to complete a Personal Financial Statement if you want to get a higher limit, often over $10K. They will take a look at your Liquidity (How much cash type of assets you have) and Net Worth. They may take a percentage of each and use that as a guide to set the limit you get. Some institutions may take a different approach, but if they are looking at a Personal Financial Statement, it will be similar. Let’s look at an example: John Smith is approved from his local branch of Bank U.S.A. For an unsecured line of credit for $5,000. It is not enough and John asks for an increase, but is denied because, he is told, they have approved him for the max. A week later, a representative from Bank USA’s Credit Card Division out of Florida calls him and tells him he is pre-approved for a credit card up to $12,000. He applies, and is approved for $10,000. This happens all the time. It is the same bank and both are unsecured credit. The Bank now is at risk with Joe for $15,000 total unsecured credit exposure. It should not make any difference which part of the bank gave Joe the credit. After all, if Joe runs in to hard times and can’t pay, it’s the same bank that suffers overall. That is true but the bank doesn’t handle it that way for several reasons The division that decides on unsecured personal lines of credit is a different division than the credit card division, which is a different division than the Sales Finance Car Loan Division. Each has different credit criteria. If the unsecured line of credit division grants you $5,000 Maximum and then the Credit Card Division grants you $10,000, the credit card division will NOT say “Oops, we see you have reached the total maximum unsecured credit with our institution, so we can’t give you a credit card”. They don’t care that you already have unsecured credit with another part of the bank. In contrast, the unsecured division will not say “because the credit card division is willing to give you $10,000 unsecured, you can choose to just increase your line with us to $15,000”. They won’t. Each department has a different threshold per person. They often act like separate horses with blinders on. Each considers themselves a Business Unit within the bank. Each has different Presidents, different goals, different credit criteria, different marketing plans. Second Mortgages Second Mortgages are very desirable types of loans to get. You will get a tax advantage and most companies prefer these types of loans above all others. Most lenders would much rather do a Mortgage Loan or Second Mortgage over a personal loan, unsecured loan or small business loan. The reason is that your home is one of the best types of collateral there is. They would rather take a Certificate of Deposit for an equal dollar amount of the loan, but many more people have homes they can use as collateral. You will need to know how high of a LTV (Loan to Value) the lender will do. The higher the LTV, the better. If a lender says they will do 90% LTV, the following is an example: Sally Smith has a home worth $100,000 and she owes $50,000 on it. If the bank will loan 90% LTV that means that she has $100,000 X .9 minus $50,000 equity in her home. In this case, $90,000 minus $50,000. This particular lender will provide Sally with a maximum $40,000 equity loan against her home. If your credit is very strong, some lenders will do a 100% LTV
or even higher. If you have over a 725 credit score, you may be
able to obtain the maximum LTV Mortgage or Second Mortgage loan
on the market.
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