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Major Financial
Institutions often do not have 1 single credit
criteria for customers for car loans, personal
loans, unsecured loans, or small business loans
throughout the bank. They may have different
credit criteria for the Branches, Credit Card
Divisions, Automotive Sales Finance Division and
Mortgage Division, even though it is the same
Institutions. Thought things would be the same
at bare minimum at the same company? Not so by a
long shot.
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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