Friday, March 9, 2007

Will The Fed Help You Get A Bad Credit Auto Loan?

One of the biggest worries of car dealerships is a sudden hike in interest rates. The higher the interest rate, the more the borrower's monthly payment. Since the interest rate is calculated against the purchase price of the car, a higher interest rate could prevent many borrowers from qualifying to finance and buy the car of their dreams.

In addition to credit scores, lenders, who make loans on personal and real property, use a debt to income ratio formula to determine a prospective borrower's maximum monthly payment . The lender then adds the borrower's estimated monthly premiums for insurance, and taxes (if applicable) to the borrower's principal and interest payments, to determine borrowers total monthly debt. The maximum debt to income ratio that lenders will generally allow is 50%.

This simply means that the total amount of your monthly payments, as currently listed on your credit report, plus the monthly payment of your prospective bad credit auto loan and/or bad credit mortgage loan, plus any applicable monthly taxes and insurance can not exceed 50% of your gross monthly income. The criteria is even sticter for good credit borrowers seeking prime rates, because most lenders require that borrowers seeking prime rates have debt to income ratio that is below 38%. Generally, most lenders only require disclosure of debts that show monthly payments on your credit. Most lenders will not be concerned about a $100 monthly payment to your mom, from repayment of a personal loan. So unless your are asked about debt beyond that, which shows on your credit report don't bring it up.

This is important to understand because, a upward interest rate spike means a higher monthly payment. Higher monthly payments, reduce the amount that a consumer can qualify to borrow. As borrowers maximum loan amounts are reduced the inventory of big ticket items like cars and real estate could increase, which would mean that supply would be greater than demand.

Can you say, "lower prices."

Fortunately, the Fed has been forced to keep interest rates low because the economy is naturally "cooling off." As long as this trend continues, the Fed will only continue to cut interest rates. This "cooling off" is fueled by subprime mortgage 'spillover,' as homeowners, who are forced to cut spending, grapple with figuring out how to pay their adjustable and variable rate mortgages. This could present opportunities for those who, although credit challenged, have a decent income and need bad credit car loans, bad credit home loans, bad credit mortgages and bad credit car loans at a decent interest rate.

Remember, the Fed raises interest rates to "cool " an economy that is too "hot" and cuts rates to excite a "sluggish" economy. Believe it, or not subprime borrowers may find it easier to get a bad credit car loan, or a bad credit mortgage in a sluggish economy than in a hot economy. The three keys to getting a subprime loan, whether it be a bad credit auto loan, or a bad credit home loan are: income, job history and residency. Income, job history and residency can compensate for a lousy credit score as long as you make a good wage. If you have a great income, but a lousy credit score, now may be the time to either purchase a car, a home, refinance and/or clean up your credit.

However, be extremely careful before you go poking around in your credit before you apply for a home loan, or car loan. Always check your credit first personally, before you apply for a loan. The reason is because when you pull your credit, it does not affect your credit score, but when lenders pull your credit it results in an "inquiry" on your credit report, which could affect your credit score.

Credible lenders can determine if you qualify for a bad credit car loan, or bad credit mortgage by examining your personal credit report that "only you" pull. Furthermore, a personally pulled hard copy of your credit report, will allow you to shop for the best rate and term with many lenders. When you select a lender that you want to work with, you then allow that lender and only that lender, to pull your credit report. The same rules apply to brokers that you may work with as well.

Best of luck!!

by Michael Peterson

Michael Peterson works as a freelance writer for two websites:, a website that specializes in helping people get bad credit auto loans., a website that specializes in helping people get bad credit bad credit home loans refinancing, and mortgages.

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