As a business owner or entrepreneur, you know that providing loans is a risk. You could end up lending money to someone who can’t or won’t repay the loan, which can negatively impact your business. That’s why screening applicants carefully before giving them a loan is important. Here’s what you need to know about how to effectively screen an applicant for a car loan.
When you’re screening an applicant for a car loan, there are several factors you need to take into account.
Look at the Applicant’s Credit Score
One of the most important factors to consider when screening applicants for a car loan is their credit score. This number gives you an idea of how likely the applicant is to repay the loan. The higher the credit score, the lower the risk. An applicant typically needs a 660 credit score to qualify for a loan without issues. A score of 760 or higher usually allows an applicant to qualify for automaker special financing, which can offer rebates and low-APR loans.
If an applicant’s credit score does not meet these qualifications, it’s not necessarily a deal-breaker. You may advise applicants to fix their credit score by paying off debts, making on-time payments, and incurring new debts.
Consider the Applicant’s Debt-to-Income Ratio
Another important factor to consider when screening applicants for a car loan is their debt-to-income ratio (DTI). This ratio measures how much of an applicant’s monthly income is going towards debt payments. A DTI of 36% or less is ideal. But an applicant with a DTI of up to 50% may still qualify for a loan. This evaluation process is important to ensure that the applicant can afford the car loan payments.
To calculate an applicant’s DTI, add up all their monthly debt payments and divide them by their gross monthly income. You can calculate an applicant’s DTI by doing these steps:
- Add up the applicant’s monthly debts, including the car loan payments.
- Divide the total monthly debt by the applicant’s gross monthly income.
- Multiply the result by 100 to get a percentage.
If an applicant’s gross monthly income is $7,000, and they have a debt of $3,000: including payments of $2,000 for a mortgage, $500 for a car loan, $300 for a student loan, and a $200 credit card. To calculate the DTI ratio: divide monthly debt obligations ($3,000) by gross monthly income ($7000), which will equal 0.429. When rounded up, multiply that number by 100 to get 42.9% or 43%.
Take a Close Look at the Applicant’s Employment History
When screening an applicant for a car loan, you should look closely at their employment history. This can give you an idea of whether the applicant will likely have a steady income stream. An applicant who has been employed in the same field for several years is usually a better bet than someone who has had several jobs in a short period. This shows that the applicant is stable and reliable.
It would be best to look at the applicant’s current employment situation. Is the applicant currently employed full-time? Part-time? Are they self-employed?
Bringing the appropriate and necessary documents will help the process go more smoothly. When you’re screening applicants for a car loan, you’ll need to collect the following documents:
Proof of Identity
According to federal law, you should verify your customers’ identities. In most cases, a driver’s license, passport, U.S. visa, or other government-issued ID with their name and photograph should suffice. However, there are times when you can verify their identity without any documentation. When this happens, you may reach out to third-party sources like a consumer reporting agency instead.
Proof of Employment and Income
The next step is to verify the applicant’s employment status and income. The most common way to do this is by asking for pay stubs or bank statements. You may ask for tax returns or profit and loss statements if an applicant is self-employed. These documents will help determine whether the applicant can afford the car loan payments.
Proof of Residency
You’ll also need to verify the applicant’s current address. The most common way to do this is by asking for a utility bill, lease agreement, or mortgage statement. If their license and credit application address match, this could be enough for you to verify their residency. However, if the applicant just moved, you may also ask for a utility bill or mortgage statement in their name.
If you want your business to succeed, you must be careful about who you give loans. Review an applicant’s credit score, work history, and earnings before making a decision. Additionally, ensure both parties understand the repayment process and timeline, so there are no misunderstandings later.