Banks look at a low credit score as a risk factor; the risk
factor is associated with the paying back of the loan amount. Not that the banks do not trust you, it is the
probable assumption that you may become a red flag/collections issue in the near
future of the loan. Not having any credit
history is exactly what it is....no credit history. Banks need to see a pattern in your payment history
of previous loans such as student loans, credit cards, etc. Without credit on file, it does not give
banks an idea of what type of risk factor you may or may not be. The debt/income ratio is typically a
percentage that banks go by for each individual where they take the total of your
monthly debts and divide it by the total of monthly income to get a risk
percentage. Thirty percent is the
maximum a bank will allow an individual’s ratio to fall upon; generally
anything above that number is a high risk factor. These few factors will all have your bank
denying you a loan for a vehicle.
Fortunately, a cosigner can save the day and back you up to potentially
help strengthen you in the eyes of the bank.
Having a cosigner on the loan allows for the bank to use the credit
score and history of the cosigner to your advantage. Now the cosigner does except the responsibility
of the loan if it happens to default, but if you pay on time throughout the
life term of the loan then your credit score will greatly improve and most
likely the next time you need a loan you can get one without the extra help of
a cosigner.
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