A Guide to Home Loans for Bad Credit

Getting a mortgage with bad credit isn’t easy. Banks and credit unions became ultraconservative with mortgage lending following the 2008 housing market crash. However, these days, tighter lending standards don’t have to force you out of the mortgage market. If you have a stable income, you may qualify for a mortgage, even with bad credit. We’ll explain the best home loans for people with bad credit, offer tips for cleaning up your credit histories and point out scams to avoid.

Quick guide to checking your credit score

If you’re just starting to shop for home mortgages, it pays to know if banks think you have bad credit or not. Here’s how FICO, the main credit score provider in the U.S., breaks down credit scores:

  • 800-plus: Exceptional
  • 740-799: Very good
  • 670-739: Good
  • 580-699: Fair
  • 579 and lower: Poor

A credit score above 740 is optimal for finding the best mortgages, but you can often secure a mortgage with a much lower score. You might find an FHA mortgage with a credit score as low as 500 (albeit with a 10 percent down payment rather than 3.5 percent rate for scores above 580), but a credit score of around 650 gives you a decent chance of qualifying for a home mortgage. Getting a mortgage with a truly bad credit score will be difficult, and improving your credit to “fair” status could make it much easier.

Where can you check your credit score? Banks and credit unions use the FICO Scores 2, 4 and 5. These are not the same scores you will find through a free credit scoring site. Unfortunately, we haven’t found a free option for checking your FICO Scores 2, 4 and 5. The best option for checking these is checking them on MyFICO, which costs $59.85.

If you don’t want to pay for a credit score, consider using a free scoring site. But don’t put too much stock in the number it offers. It may overestimate your credit score (for mortgage shopping), especially if you’ve paid off debt in collections recently, and some free scores don’t use the 300-850 scale FICO often uses. Instead, focus on the information about what’s helping and hurting your credit score, if the tool offers those insights, and use that knowledge to make improvements where you can.

You can get a free credit score through our parent company LendingTree.

Home loan programs for people with bad credit

FHA loans

FHA Loan Details

Credit score required

500, but banks have minimum underwriting
standards

Down payment required

Credit score between 500-579: 10 percent
Credit score above 580: 3.5 percent

Upfront financing fee

1.75 percent, which can be financed

Mortgage insurance

0.45 to 1.05 percent

Mortgage limits

Generally, $275,665 for single-family units, but it
varies by location and you should check the limits in your area

Fine print

Mortgage insurance premiums are paid for the life of the loan,
except when putting 10 percent or more down. If your down payment is
less than 20 percent but 10 percent or more, you must have
mortgage insurance for 11 years.

Quick take

If you have bad credit, an FHA loan offers a more accessible mortgage. While credit standards vary by lender, you may qualify for the FHA loan with a credit score as low as 500. With a credit score above the 580 threshold, you may qualify for the 3.5 percent down payment.

Unfortunately, an FHA loan can be expensive because of mortgage insurance fees. In addition to paying ongoing mortgage premiums for the life of the loan, you’ll have to pay a 1.75 percent upfront financing fee.

Pros:

  • 3.5 percent down payments (for those above the 580 credit-score mark)
  • Credit scores as low a 500
  • Can buy up to four units

Cons:

  • 1.75 percent upfront mortgage premium
  • Ongoing mortgage insurance
  • Smaller loan limits

Where to get an FHA loan

You can use the comparison tool on LendingTree or Zillow to find offers from FHA-approved lenders in your area willing to work with people with bad credit. If an online search doesn’t yield the results you want, you may need to work directly with a mortgage broker who specializes in finding mortgages for people with bad credit. You can use a site like Find A Mortgage Broker or Angie’s List to find brokers in your community.

Be sure to check the National Multistate Lending System (NMLS) to see if your broker has had any regulatory action filed against them. Regulatory actions against the broker are red flags that indicate you may want to take your business elsewhere.

Fannie Mae HomeReady Mortgage

HomeReady Mortgage Details

Credit score required

A minimum requirement of 620 generally applies
to Fannie Mae products.

Down payment required

3 percent for credit scores above 680
(for single family homes). 25 percent for credit scores
between 620-680 (for single family homes).

Upfront financing fee

None

Mortgage insurance

0.125 to 3 percent

Mortgage limits

Generally, $424,100, though it varies by location

Fine print

You must earn less than the median income in
your ZIP code to qualify,
or buy a home in a low-income zip code.
You must take a homeowner’s education class to qualify for the mortgage,
mortgage insurance can be canceled when you reach a
loan-to-value ratio of 80 percent.

Quick take

If you’ve got a fair credit score but a big down payment, the Fannie Mae HomeReady mortgage is the best conventional mortgage for you. With a 620 credit score and a 25 percent down payment, you meet HomeReady eligibility requirements, and you’ll pay no mortgage insurance. Fannie Mae offers a 3 percent down payment option, but you need a credit score of at least 680.

HomeReady mortgages also allow for cosigners who won’t live at the address with you. That means a parent or grandparent with a high credit score could help you purchase the property by co-signing. If you can find a cosigner, you may qualify for the 3 percent down payment even if your credit score falls below 680.

Pros:

  • Can qualify with credit score as low as 620
  • A low 3 percent down payment if you have a 680 credit score
  • Down payment doesn’t have to come from personal funds
  • Mortgage insurance premiums are cancellable
  • Non-occupant cosigners are permitted

Cons:

  • Up to 25 percent down payment required in some instances
  • Not all lenders offer Fannie Mae HomeReady mortgages, so you might struggle to find a bank with this offering.

Where to get a Fannie Mae HomeReady mortgage

Fannie Mae doesn’t publish a list of lenders who offer the HomeReady mortgage, so you will need to work with your lender specifically to see if they offer it. Most major banks and credit unions will be approved to underwrite Fannie Mae mortgages, but the specific product offering will vary by bank.

Consider using an online mortgage comparison engine including LendingTree or Zillow to compare offers in your area. However, once you find lenders that will work with you, you’ll have to ask them about the HomeReady mortgage, especially if you want to use the 3 percent down or co-signing feature.

The Housing and Urban Development office of housing counseling may also help you connect with lenders who offer the HomeReady Mortgage.

VA loans

VA Loan Details

Credit score required

Credit standards set by lender

Down payment required

None

Upfront financing fee

1.25 to 3.3 percent, which can be financed

Mortgage insurance

None

Mortgage limits

Generally, $424,100, though it varies by location

Fine print

Must obtain a certificate of eligibility
(for military members and spouses)
before applying for a VA loan

Quick take

For people with a military background, the VA loan is a top mortgage option. The upfront financing fee can be hefty, but it’s a good deal if you plan to live in the house for several years. That said, not all VA lenders work with buyers with bad credit, so you may struggle to find a reputable lender in your area.

Pros:

  • No down payment required
  • No mortgage insurance
  • No firm credit minimums
  • Can buy up to four unit multi-family property.

Cons:

  • Upfront funding fee
  • Not all lenders issue VA loans to borrowers with bad credit
  • Must buy home with the intent to occupy for at least 12 months

Where to get a VA loan

To take out a VA loan, you must get a certificate of eligibility (COE) through the Veterans Administration eBenefits platform. Once you get the COE, you can use the Consumer Finance Protection Bureau’s interest rate data to learn about interest rates for VA loans.

To find a VA lender who works with bad-credit clients, you’ll probably want to work with a mortgage broker. You can find mortgage brokers online or through your state’s housing finance agency. Be sure that your broker has no regulatory action filed against them before you commit to working with them.

USDA loans

USDA Loan Details

Credit score required

As low as 580, but generally 640

Down payment required

None

Upfront financing fee

1 percent (can be financed)

Mortgage insurance

0.35 percent annually

Mortgage limits

No limits, but must meet standards of affordability based on moderate incomes

Fine print

You must meet income eligibility requirements,
and the property must be in a qualified rural area

Quick take

If you’re planning to buy in a rural area (and you may be surprised what qualifies, so check), a USDA loan offers a low cost, low money down loan. Technically, the absolute minimum credit score for this loan is 580, but most lenders won’t issue USDA loans to borrowers with scores below 640. USDA loans tend to be a better deal than FHA loans, but they may have higher costs compared to VA or conventional loans. If you’ve got fair credit, but you don’t have a big down payment, the USDA loan makes sense for you.

Pros:

  • No down payment
  • Only 1 percent upfront mortgage fee

Cons:

  • Ongoing financing fee cannot be canceled
  • Finding lenders who work with bad credit borrowers can be difficult
  • Must meet location and income criteria

Where to find USDA loans

If you meet the USDA eligibility requirements, you can start shopping for USDA loans through LendingTree, but you may not find many offers if you have a credit score below 640. If you can’t easily find a lender, you’ll want to work with an independent mortgage broker who will have insider access to multiple lenders in your city. You can find reputable brokers online through Find A Broker, Angie’s List or the Better Business Bureau (search for mortgage brokers, your city). Before committing to a broker, check that your broker has no regulatory action filed against them.

Manufactured home loans for bad credit

Manufactured homes are houses constructed off-site, transported and anchored to a permanent foundation at a new home site. On average, manufactured homes cost 80 percent less than site-built single family homes, but taking out a mortgage for a manufactured home can be expensive, even if you have good credit. According to the Consumer Financial Protection Bureau, almost 68 percent of all loans for manufactured home purchases were considered higher priced mortgages. On top of already high rates, bad credit will drive your interest rate even higher. However, thanks to the lower upfront price, people with bad credit may have an easier time finding home financing for manufactured homes than for site-built homes.

FHA Title I loans (Chattel loans)

FHA Title I Loan Details

Credit score required

No credit score minimums, but
must meet ability to pay criteria

Down payment required

5 percent down for credit scores above 500,
otherwise 10 percent down

Upfront financing fee

Up to 2.25 percent

Mortgage insurance

Up to 1 percent

Mortgage limits

  • Home only: $69,678

  • Lot only: $23,226

  • Home and lot: $92,904

Mortgage term limits

  • 20 years for home only

  • 20 years for single-section home and lot

  • 15 years for lot only

  • 25 years for a multi-section home and lot

Titling requirements

Manufactured homes can be titled as personal property.

Fine print

Manufactured homes must be situated on a lot that meets
FHA property standards (such as hookups for water and electricity,
and foundation anchors) that is owned or leased by the primary
mortgage holder. Manufactured home must be at least 400 square feet.

Quick take

The FHA Title I loan is an obvious choice for people with bad credit looking to buy a manufactured home, but you need to do your research before you commit to this loan. According to the CFPB, Chattel loans had 1.5 percent higher APRs than standard mortgages. These loans also come with expensive mortgage insurance fees that can be passed on to you.

However the Chattel loan makes sense if you’re buying a used manufactured home or if you plan to rent the lot where your home sits.

Pros:

  • No credit standards
  • Flexible terms for land ownership
  • Can title home as personal property

Cons:

  • Maximum loan is $92,904
  • Some lender restrictions
  • 5-10 percent down payment requirement
  • Must be a fixed term mortgage

Where to find Chattel loans

Chattel loans are a niche product that few banks and credit unions offer. Half of all Chattel loans are issued by five banks: 21st Mortgage, Vanderbilt Mortgage, Triad Financial Services, U.S. Bank, and Credit Human (formerly San Antonio Federal Credit Union), according to a 2014 report from the CFPB. You can also find local lenders through the Manufactured Housing Association’s lender search.

FHA loan

FHA Loans Details for Manufactured Homes

Credit score required

500 (varies by bank)

Down payment required

Credit score between 500-579: 10 percent
Credit score above 580: 3.5 percent

Upfront financing fee

1.75 percent, which can be financed

Mortgage insurance

0.45-1.05 percent

Mortgage limits

Generally $275,665

Titling requirements

Manufactured homes must be titled as real
property and you must own the lot.

Fine print

All manufactured homes must meet standards set by the
FHA including foundation anchors, water and electrical hookups and more.

Quick take

A standard FHA loan makes sense if you’re planning to buy a manufactured home and land. While credit standards vary by lender, you may be able to qualify for the FHA loan with a credit score as low as 500. If you can raise your credit score to 580, you may even qualify for the 3.5 percent down payment.

This loan isn’t as easy to get as the Chattel loan, but some people with bad credit may qualify. If you want to use an FHA loan for a manufactured home, work with your loan officer closely, so your financing is in place before your home is completed.

Pros:

  • 3.5 percent down payments
  • Credit scores as low a 500
  • Up to $275,665 in financing

Cons:

  • 1.75 percent upfront mortgage premium
  • Must pay ongoing mortgage insurance
  • Must buy owner-occupied home

Where to get an FHA loan

The Manufactured Housing Association’s lender search will also provide a list of lenders who may offer FHA loans for manufactured homes in your state. If that list doesn’t provide the results you need, work with a HUD office of housing counseling center to learn about lenders who offer FHA loans for manufactured homes.

USDA

USDA Loan Details for Manufactured Homes

Credit score required

580 and below is considered a no-go;
generally 640 and up

Down payment required

None

Upfront financing fee

1 percent, which can be financed

Mortgage insurance

0.35 percent annually

Mortgage limits

No limits, but must meet standards of
affordability based on moderate incomes

Titling requirements

Home must be titled and taxed as real estate

Fine print

You must own the lot where your home is located and meet
income eligibility requirements and the property must be
in a qualified rural area

Quick take

If you’re purchasing a new manufactured home in a rural area, the USDA loan may make sense for you. The manufactured home must be new, and you have to own the site where the home is located. However, with the lowest acceptable credit score being at the 580 threshold, USDA loans aren’t suited for bad-credit borrowers. Improving your credit to “fair” could be the difference between rejection and approval..

Pros:

  • As low as no money down
  • Low financing fees
  • Competitive interest rates

Cons:

  • Higher credit underwriting standards
  • Must own lot
  • Must buy new manufactured home

Where to get a USDA loan

If you meet the USDA eligibility requirements, connect with the HUD office of housing counseling in your state. If the USDA loan is a good fit for you, staffers there will help you find lenders who work with USDA borrowers that want in on manufactured homes.

VA loans

VA Loan Details for Manufactured Homes

Credit score required

Credit score standards set by lender

Down payment required

None

Upfront financing fee

1.25-3.3 percent depending on your military status,
home buying experience and down payment.
This fee can be financed.

Mortgage insurance

None

Mortgage limits

$424,100

Titling requirements

The house must be titled as real property,
and you must own the lot where the house is located.

Fine print

Must obtain a certificate of eligibility
(for military members and spouses) before applying for a VA loan.

Quick take

The VA loan offers a down payment of 0 percent (even for manufactured homes) as long as you own (or will buy) the lot where the home is located. The drawback to the VA loan is that most lenders set their credit score standards in the 600-range, which means that people with bad credit might not qualify. On top of that, not every VA lender offers loans for manufactured homes. Those two factors mean the you may struggle to find a lender in your area who will work with you.

If you find the lender, the VA loan is a great choice, but if you can’t, consider an FHA loan instead.

Pros:

  • No down payment required
  • No mortgage insurance
  • No firm credit minimums

Cons:

  • Upfront funding fee
  • Not all lenders offer VA loans for manufactured housing
  • Must buy home with the intent to occupy for at least 12 months
  • Must own lot

Where to get a VA loan

To take out a VA loan, you must get a certificate of eligibility (COE) through the Veterans Administration eBenefits platform. Once you get this, find an independent mortgage broker who specializes in VA loans for manufactured homes or VA loans for people with bad credit. These brokers work with multiple banks and can help you find better deals than you might find on your own. Before committing to a particular broker, check for regulatory action filed against them. You don’t want to work with a broker who fails to meet the standards set by your state.

Conventional mortgages

Conventional Mortgage Details for Manufactured Homes

Credit score required

620

Down payment required

5 percent (10 percent for people with insufficient
credit for traditional scoring)

Upfront financing fee

None

Mortgage insurance

0.5 percent annually

Mortgage limits

Generally, $424,100

Titling requirements

Must own land, and home must
be titled as real property.

Fine print

You’ll have to pay mortgage insurance until your
home reaches at least an 80 percent loan-to-value ratio.

Quick take

If you’ve got a 20 percent down payment and at least a 620 credit score, and your home meets underwriting standards, the conventional mortgage is the best choice for you. This loan has competitive interest rates and no mortgage insurance for people with a loan-to-value ratio of at least 80 percent. Your home must be at least 600 square feet and meet HUD standards for manufactured homes, and you must own your lot. However, you can use this loan to purchase an existing manufactured home (built after 1976) if it is permanently affixed to an approved foundation.

Another advantage to this loan is that they do accept borrowers with thin credit files, provided they don’t have derogatory marks on their credit file.

Where to find conventional mortgages

Before you start shopping, you can use the Consumer Finance Protection Bureau’s interest rate data to learn about interest rates in your state. Compare real offers from local lenders using LendingTree, or work with your state’s housing finance agency to find reputable lenders in your area.

Other common financing deals

Aside from those mortgages, manufactured home buyers with bad credit might consider two other options. First, you might consider a retail installment contract. A retail installment contract is issued by the manufacturer (or installer) or your home. If you’re working directly with the manufacturer to take out a loan, you should take the time to understand upfront and ongoing fees, APR and what happens if you miss a payment. The Manufactured Housing Institute provides detailed information on buying and living in manufactured houses and on how to find manufacturers and lenders who can help you finance a manufactured home.

Borrowers with bad credit might also consider owner-held financing option. Owner-held financing is a readily available form of credit, but it is risky. Before signing a lease to own agreement, find a real estate lawyer who can help you uncover title issues and explain the loan. To learn more, you can either find a lawyer through your employer (who may offer legal benefits), the American Bar Association or by contacting HUD office of housing counseling in your state.

Clean up your credit before mortgage shopping

In 2016, the average new home cost $372,500, but that’s before paying interest. According to Informa Market Research, the average interest rate for a person with a credit score between 620 and 639 is 5.115 percent, but a person with a score of at least 760 gets a 3.527 percent rate. Does just a point and a half translate to much cost difference? Absolutely. If both people finance $298,000 on a new home, then the person with great credit will pay $1,343 per month. The person with lesser credit will pay $278 more, $1,621 per month. That translates to more than $100,000 more over the life of the loan.

Tips to improve your credit score

To repair your credit before taking out a mortgage, and qualify for better terms and more options, start with these three simple steps:

  1. Pay all your current debt accounts on time, each month.
  2. Reduce your credit card utilization by paying down your credit card debt.
  3. Stop applying for credit six months before mortgage shopping.

These three factors alone account for 75 percent of your credit score.

As you take care of those items, you’ll want to check your credit report from the three major credit bureaus through AnnualCreditReport.com.

You want to be sure that you recognize all the information on your credit report, and that there are no duplicate entries. Dispute any errors or duplicates. For further guidance, use the Federal Trade Commission’s free guide to disputing errors on your credit report. If you believe you’ve been a victim of identity theft, follow the Federal Trade Commission’s advice on identity theft recovery.

Disputing errors on your credit report may prevent a bank from issuing you a mortgage, so start disputes at least 90 days in advance of applying for a mortgage. While the credit bureaus should clean up the errors within 30 days, the process sometimes takes longer

Getting a mortgage after bankruptcy or foreclosure

Bankruptcy stays on your credit report for up to seven or 10 years, depending on the type, and foreclosures stay on your credit report for up to seven years, but you don’t have to wait that long to take out a mortgage. If you take steps to improve your credit, you can qualify for some mortgages one to four years after your bankruptcy is dismissed, or two to four years following foreclosure.

 

Conventional

FHA

VA

USDA

Chapter 7

Four years from discharge or dismissal (except in extenuating circumstances)

Two years (or one year in extenuating circumstances)

Generally, two years (though it is not a disqualifying standard)

Generally, three years

Chapter 11

Four years from discharge or dismissal (except in extenuating circumstances)

Must meet credit standards

Generally, two years

Must meet credit standards

Chapter 13

Two years after discharge or four years after dismissal

Two years (or one year in extenuating circumstances)

One year of payments

Generally, one year

Foreclosure

Seven years, except if foreclosure was discharged in bankruptcy (then use bankruptcy limits)

Three years except in extenuating circumstances

Generally two years

Generally, three years

Even if you can get a new mortgage just a year or two after bankruptcy or foreclosure, it makes sense to wait longer in most cases. By waiting around three or four years, the damage of the bankruptcy and foreclosure fades, and you’ll have that extra time to revive your credit score.

To get your credit in shape after bankruptcy or foreclosure, you’ll want to continue to make bankruptcy payments as agreed and consider opening a secured credit card to rehabilitate your damaged credit. Use the credit card for daily expenses, and pay it off in full each month.

Improve your shot at approval even if you have bad credit

If you’ve got bad or fair credit, and you don’t have a lot of time to improve it, you can still take out a mortgage in some cases. These are a few things that can help you get approved with a low credit score.

  • Choose a house well within your budget. If you’ve got a strong income and a low monthly payment, the bank may be more likely to approve your loan.
  • Come up with a larger down payment. While the median down payment is just 5 percent, a person with bad credit may need quite a bit more (up to 25 percent) to get a loan.
  • Work with your loan officer: Give them paperwork in a timely manner, and follow their instructions regarding credit repair, collection repayments and debt repayments. If you’re close to gaining approval, the loan officer can help you take the last few steps to meet the bank or government’s underwriting criteria. Loan officers may take advantage of manual underwriting provisions for FHA, VA, USDA and conventional loans, but that requires more information and participation from you.
  • Ask for rapid rescoring if you’re disputing errors on your credit report, or paying down credit card debt.

Rapid rescoring

A rapid rescore is a method for “re-checking” your credit score on an accelerated time scale. Banks usually only check your credit score once when they’re considering your for a loan, but they may pay a fee to see a new score if you’ve paid down debt or removed negative information from your report, according to Experian. The bank will use the new information to recalculate your credit score to see if you qualify for a loan.

Should I keep renting?

A bad credit score by itself shouldn’t stop you from buying a home. You’ll pay more in interest costs over the life of the loan, but you’ll also start building equity sooner. Plus, a few years of paying on a mortgage will help you raise your credit score, so you can refinance later on.

However, a bad credit score can be a symptom of a bad financial situation. If you’re struggling to pay your bills on time, buying a house isn’t usually a good idea. During financial stress, a new mortgage bill is more likely to be a curse than a blessing.

Watch out for these scams targeting people with poor credit

Financial scammers are always on the prowl for desperate people who might become their next victims. These are a few pitfalls that all homebuyers need to avoid as they shop for homes and mortgages.

Mortgage closing scams

Mortgage closing scams are pernicious schemes that involve falsifying wiring instructions, the FTC warns. In a mortgage closing scam, a hacker poses as a title closing agent. He or she may email you fraudulent information about where to wire the money, or claim that there’s been a last-minute change to the details.

Closing for a home is an incredibly busy time, especially if you’ve struggled to qualify for the mortgage in the first place. To prevent mortgage closing scams, ask your title agent to send the wire information in an encrypted email. You can also request a call with the details.

Anyone who has been a victim of a mortgage closing scam should report it to the FBI immediately, and log a complaint in the FBI’s Internet Crime Complaint Center.

Complex lease-to-own deals

Owner financing isn’t necessarily a scam, but it can be complex. Many owner financing deals don’t put the title into your name until you’ve paid off the entire loan, and some deals require balloon payments after a few years, the FTC warns. If you can’t cover the balloon payment, you lose every cent of equity you’ve paid.

Even worse than difficult loan terms are situations when the owner can’t legally issue a first-lien loan. If the owner has used the house to secure any other loan, then the bank has a first-lien position on the loan.

Don’t sign an owner financing agreement until a lawyer explain the details of the loan to you. You must take steps to protect yourself from owner fraud if you want to own the house in the end.

Hard money loan scams

Hard money loans are real estate loans for investors interested in flipping a property. Hard money loans come with high interest rates, hefty down payments and short payback periods. Most of the time, hard money lenders evaluate project quality rather than investor credit when issuing loans.

If you’re considering a hard money loan at all, you should have plans to flip a property for a profit. If you can’t earn a profit on the house, then a hard money loan doesn’t make sense.

If you are considering a hard money loan because you can’t find traditional financing, be careful. There’s little oversight of hard money loans, so it’s important you know what you’re getting into with these products. You can check out this guide to hard money loans if you want to learn more.

FAQs

If a bank turns you down for a mortgage, you can ask for an explanation. When you ask, the lender has 30 days to prepare an answer in writing, as required by the Equal Credit Opportunity Act and the Fair Credit Reporting Act. A few common responses include:

  • We don’t think you can afford the payment (for instance, you’ll have to high of a debt-to-income ratio).
  • Your credit score’s too low.
  • You have an insufficient down payment.

Anyone struggling to find a mortgage should consider working with a licensed mortgage broker in his/her county. Mortgage brokers work with multiple local banks and credit unions, and they can often help if a banker cannot.

The best credit score to get a mortgage is any score above a 740, but most people with credit scores above 620 will qualify for some mortgages. And yes, it’s possible to qualify for a mortgage if you have a score of 500-620.

Yes. If you took out a loan when you had bad credit, you may qualify for a much better rate by improving your credit after just one to two years of on-time payments on all your lines of credit, according to research from VantageScore Solutions. However, if your bad credit score is the result of foreclosure or bankruptcy, your credit score may not fully recover for seven to ten years, so don’t count on a massive rate drop right away if those are the reasons for your bad credit score.

Given how much easier it is to qualify for a mortgage and how much you can save when you have good credit, waiting to buy often makes sense.

VA loans don’t require a down payment, and they have no firm credit minimums, but you’ll still need to meet a bank’s underwriting standards (which could be as high as a 640 credit score). If you have a credit score of 580-640 and you meet other qualifying standards, you may qualify for a no-money-down USDA home loan..

Outside these options, the only no-money-down mortgages for people with bad credit include owner-held mortgages or rent-to-own deals. Do your homework.

Not all mortgages allow cosigners, but a cosigner could help you qualify. Asking someone to cosign essentially means asking that person to pay your mortgage if you’re ever unwilling or unable to pay the bill. We generally don’t recommend becoming a cosigner unless you plan to live in the house.

An adjustable-rate mortgage makes a lot of sense if you have bad credit and you are confident you can improve your credit score within seven years before your interest rate adjusts (in the case of a 7/1 ARM). If your credit improves, you may be able refinance at a lower, fixed rate before the interest rate adjustment takes place. However, this option is risky. You may be stuck with higher interest rates if your credit doesn’t improve or if interest rates rise by the time you need to refinance.

The post A Guide to Home Loans for Bad Credit appeared first on MagnifyMoney.

America’s Super Saving Cities: The regional forces shaping America’s saving landscape

Where do America’s biggest savers live? Using IRS and U.S. Census data, MagnifyMoney created a City Saving Score for over 2,000 U.S. cities to explore which cities have the most savers and which cities have the biggest savings accounts.

On average, 29 percent of Americans who filed tax returns in 2016 earned interest income on their savings. Average interest income was $530 per return, representing 0.8 percent of total reported income. But regional, demographic and economic forces drive some cities to become super savers while others languish behind. Residents of Greenwich, Conn., earned an average of more than $25,000 in interest income per resident, while in Camden, N.J., just 4 percent of the residents had enough savings to require reporting to the IRS.

Why is there so much variation?

In this report, MagnifyMoney reveals America’s super saving cities, and the forces driving their success as savers.

Key Findings

  • Scarsdale and Garden City, N.Y., are tied for #1 as the cities with the biggest savers overall, with a City Saving Score of 99.6 out of 100.
  • Los Altos, Calif., has the highest concentration of savers — 71 percent of residents reported interest income on their tax returns.
  • Greenwich, Conn., residents earned the most from interest on savings — over $25,000 per filer.
  • Among cities with incomes under $150,000 a year, The Villages, Fla., had the biggest savers with a City Saving Score of 98.5.
  • Camden, N.J., had the lowest activity among savers — only 4 percent of residents reported interest income and an average $8 a year in interest.
  • Communities in the New York, Washington, D.C., Los Angeles, San Francisco and Chicago metros represented over 75 percent of the top 5 percent of city saving rankings.

Behind the rankings: The ‘City Saving Score’

There is no comprehensive data that shows the average amount Americans are saving at a metro or city level, so we had to get a bit creative to determine where the biggest savers live.

To rank cities, MagnifyMoney created a “City Saving Score.” Using data for over 2,000 cities, MagnifyMoney ranked cities based on three factors:

  • Breadth of community savings (measured by the percentage of all tax returns that declared interest income, ranked by percentile).
  • Dedication to savings relative to income levels (measured by the percentage of total income that came from interest, ranked by percentile).
  • Magnitude of savings in the community (measured by the average interest income per tax return, ranked by percentile).

Top cities for big savers: Scarsdale and Garden City, New York

Scarsdale, N.Y., and Garden City, N.Y., scored the highest marks on our City Saving Score, with scores of 99.6 out of a possible 100.

They have an obvious advantage on the savings front — Scarsdale residents report an average income of more than $450,000 per tax return, putting them in the top 1 percent of earners in the U.S. today.

On average, savers in Scarsdale declared $9,258 in interest income — 17.5 times as much as the average American saver, who declared $530 in 2016.

Scarsdale savers are also enjoying a higher savings rate than many others. According to the IRS data, 2 percent of their income came from interest earned from savings accounts, which is 2.5 times the national rate of 0.8 percent.

It’s not just the savings volume driving Scarsdale’s place at the top. Two-thirds of Scarsdale residents reported interest income on their tax returns in 2016. That’s more than twice the national rate of 29 percent.

In Garden City, N.Y., residents earned just over $247,000 on average, putting the average household in the top 5 percent of American earners. Just under two-thirds (64 percent) of Garden City residents report income from interest.

However, with the average Garden City resident declaring $5,520 in interest, that represents 2.2 percent of overall income (10 percent more than their peers in Scarsdale, and almost three times the national rate).

The city where (almost) everyone saves: Los Altos, California

In addition to focusing on the amount people earn from their savings, we wanted to look at the share of savers in each city, which gives us an idea of a community’s total commitment to saving. The IRS requires anyone who earns more than $10 in interest income to declare interest income on their tax return. Even in the current low-interest environment, many middle-income savers could have qualified to declare interest income in 2016.

Among the top 10 cities with the most savers, two (The Villages, Fla., and Sun City West, Ariz.) had average incomes below $100,000 in 2016. Both cities feature large retirement communities, and these residents may have a higher propensity to keep their investments liquid compared with younger residents.

However the city with the most savers was Los Altos, Calif., where the average reported income is $476,000 annually. In Los Altos, nearly three-quarters (71 percent) of residents were savers. This is more than double the national average of 29 percent. The average interest income in Los Altos, Calif., was $5,299 — 10 times the national average.

Sky-high interest income in Greenwich, Connecticut

Greenwich, Conn., may not have the highest share of savers in the country (just over half (52 percent) of the city’s residents declared interest income on their tax returns in 2016). But their savers are making a bundle on earned interest.

Average interest income per return for the 2016 tax year was $25,451 — more than 48 times the national average of $530. If savers in Greenwich earned an average of 2% interest on their savings, the average saver would have held nearly $1.3 million in savings. The more than $25,000 in interest income constitutes 3.8 percent of the average reported Greenwich income, which is $664,000 annually thanks to a large number of hedge fund managers and other finance executives living in the area.

In terms of absolute interest income, Greenwich savers lead the pack by a wide margin. Second place Beverly Hills earns $16,638 in interest, just two-thirds of the Greenwich rate. In third place, Scarsdale earns $9,258.

Where do the biggest savers live?

Over three-quarters (77 percent) of the cities with scores of 95 or above came from just five major metro areas. These include the New York Tri-State area, the Washington, D.C., metropolitan area, San Francisco Bay Area, Southern California, and Chicago. Retirement communities in Arizona and Florida also feature prominently in the top saving communities, while just 15 percent of all major savings hubs are outside one of the areas mentioned above.

High saving doesn’t require high income

All cities with average incomes in excess of $250,000 earned a savings score of 90. However, some cities with lower incomes made surprise appearances near the top of the savings ranking.

In fact, 14 cities with incomes under $150,000 a year had scores of 95 or above in our study. Many of these “thrifty cities” have large retiree populations like The Villages, Fla., and Sun City West, Ariz. However, other thrifty cities included family-oriented suburbs where average households earned an upper-middle-class income.

  • Agoura Hills, Calif. (96.6 score), a Los Angeles suburb where a quarter of all residents are under the age of 19. Average income among tax filers in the city is $137,000, 60 percent of the average income of other top saving cities. Despite having more children and lower incomes than most other big saving cities, half of Agoura Hills households reported interest income. The average saver in Agoura Hills earned $1,913 per year in interest, 3.6 times the national average of $530.
  • Arcadia, Calif. (95.7 score) is another Los Angeles suburb with an average reported income of $101,000. In addition to modest average incomes (by Southern California standards), nearly 1 in 4 residents in Arcadia is under the age of 19. This means that plenty of households have to pay the high costs of raising kids. In spite of this, 48 percent of taxpayers report interest income, with the average return boasting $1,420 in interest income.
  • Towson, Md. (95.1 score), home of Towson University. In the Baltimore suburb, half (49 percent) of filers report interest income from savings. Despite an average reported income of $125,558, savers earned an average of $1,464 in interest income in 2014.

Where saving isn’t happening

Although rising interest rates are a boon for savers, plenty of communities will struggle as consumer debt rates rise, and income prospects remain middling. The cities with the lowest savings scores are spread throughout the country, but they have a few things in common. The average reported income in the bottom 5 percent was $35,000. That’s 41 percent less than the median income household in the United States today.

Most of the worst saving cities lost job-heavy industries over the course of the last 20 to 50 years. Rust Belt cities like Detroit, Mich., and East St. Louis, Ill., over-represent the bottom 5 percent in savings ranks. Likewise, former industrial towns in the Northeast like Camden, N.J., and Chester, Pa., also fell into the bottom 5 percent of saving cities. Many of the worst saving cities suffer from declining populations as younger generations seek economic opportunities elsewhere.

METHODOLOGY: How we ranked cities with the biggest savers

To rank cities, MagnifyMoney created a “City Saving Score” on a scale of 0 to 100 that included three equally weighted components:

  • How broadly members of the community saved (measured by the percentage of all tax returns that declared interest income, ranked by percentile).
  • The community’s dedication to saving regardless of their income (measured by the percentage of total income that came from interest, ranked by percentile).
  • The absolute magnitude of savings in the community (measured by the average interest income per tax return, ranked by percentile).

MagnifyMoney measured these factors using anonymized data from tax returns filed with the IRS from January 1 to December 31, 2016. ZIP code level data was translated to a city level using the primary city assigned to each ZIP code. The study was limited to cities with a combined primary ZIP code population of 25,000 or more.

To be counted as a saving household, the taxpayer must declare interest income using a form 1099 on their 2016 tax returns. Any filers who earned over $10 on investments, including a high-yield checking or savings account, a CD, a money market account or certain types of taxable bonds, would have reported this income to the IRS.

Interest income is an imperfect way to measure a particular community’s dedication to saving. Many people keep their cash in low-yield checking accounts, and some savers will not use financial instruments declared on Form 1099. In many parts of the country, savers and investors may prefer to build wealth using stocks, real estate or other forms of investments while keeping lower cash reserves.

Despite these drawbacks, interest income from the 1099 form represents a useful proxy for overall savings. The financial instruments that require 1099 reporting include many types of liquid savings that are easily accessible with negligible risk. Most people use interest-bearing accounts to hold funds for use in the case of job loss or a related emergency, or to mitigate consumer debt by paying for larger purchases in cash.

 

The post America’s Super Saving Cities: The regional forces shaping America’s saving landscape appeared first on MagnifyMoney.

Guide to Small Business Funding for Women

Source: iStock

Over the last decade, women-owned firms grew by 45 percent to 11 million businesses, according to the 2016 State of Women-Owned Businesses Report commissioned by American Express. That’s five times faster than the national average, and now, more than one in three private businesses are owned by women.

Pain points for women-owned businesses

But not everything is looking rosy for women-owned businesses. Average revenue for a woman-owned business is just $143,000 per firm, about 80 percent less than the average revenue earned by businesses owned by men. When it comes to using financing to expand businesses, men are far more aggressive. According to the SBA Office of Advocacy, 34.3 percent of female business owners didn’t use any form of financing to start their business compared to 21.9 percent of male owners.

Whether it’s due to lower revenues or other issues, many women struggle to find financing to grow their businesses. For the most part, financing options for small businesses are the same no matter who the owner is. But there are some sources specifically for female entrepreneurs, and in this guide we explain how female business owners can maximize opportunities for financing success.

Small Business Loan Options for Women

Small Business Administration-backed loans

The Small Business Administration (SBA) has a department dedicated to growing women-owned businesses, and part of what the SBA does is provide financial assistance to small businesses. The SBA has several loan programs, but the most common one is the 7(a) loan program. The 7(a) loan is a general loan, which means it can be used for anything from real estate purchases to working capital. However, the bank underwriting your SBA loan may limit how you can use the proceeds of the loan.

With the 7(a) loan, the SBA pays lenders up to 85 percent of the loan value if a borrower defaults. This encourages banks to issue business loans to businesses that might otherwise be considered too risky. As a business owner, you may have to put up collateral for 15 to 50 percent of the loan that the SBA doesn’t guarantee. Business owners can apply for SBA 7(a) loans up to $5 million.

Not only does the SBA guarantee part of the loan, the interest rates on these loans are limited by the SBA. Lenders cannot charge origination fees or burdensome packaging fees on their SBA loans. However, you should expect to pay a guarantee fee. The guarantee fee is a percentage of the total principal value of the loan paid to the Small Business Administration in exchange for guaranteeing the loan. The SBA only assesses fees on the portion of the loan they guarantee.

The table below shows the maximum interest rates and guarantee fees on SBA loans.

With ceilings as low as 6.5%, SBA-backed loans can be great deals, but they are hard to get. Lenders will consider your personal and business credit history, your business assets and your ability to make money. Despite giving women-owned businesses special consideration for SBA financing, just 15 percent of 7(a) loans issued in 2017 went to female owners.

Shannon McLay, founder of the Financial Gym in New York City, tried to take out an SBA-backed loan to expand her business to a second location. She applied for a $1.5 million loan, and she put up her personal residence as collateral. However, several banks turned her down. She explained, “Even though the government guarantees a big part of the loan, you still have to go through a bank’s underwriting process. I thought the [Financial Gym] had sufficient revenues to get a loan, but I was turned down. The bank explained that they usually issue loans to franchises, restaurants and retail shops rather than service industries.”

These are some of the best companies to work with if you want to apply for an SBA 7(a) loan. They offer strong lending programs, and they each fill unique niches. However, if you prefer to work with local lenders, you can consider working with one of the top SBA lenders in your region.

Business lines of credit

A business line of credit allows you to borrow money whenever you need it, up to your specified credit limit. A common credit limit is one to two months of gross revenue, though newer businesses may receive less. Credit limits vary by lender.

Annual fees on lines of credit can be a few hundred dollars per year, but the interest rates can be lower than credit card interest rates (they can also be much higher). Plus, you’ll only pay interest when you’re borrowing money, and you’ll build credit.

Some banks offer SBA-guaranteed lines of credit called CAPLines. Because the SBA has a goal of funding more women-owned businesses, a CAPLine may be a good fit for female business owners. CAPLines are small business lines of credit where the SBA backs 75 to 85 percent of the credit line up to $5 million. The CAPLines have specific use requirements that include fulfilling customer contracts, meeting seasonal needs, or consolidating short-term debt. They are not as flexible as typical business lines of credit. The interest rate on a CAPLine could be up to 10.75%.

You can also use Lender Match from the SBA to find local lenders that offer the CAPLine program.

Short-term loans

Short-term business loans allow business owners to borrow a small amount of money and pay it back within three to 36 months. Such loans allow businesses to cover seasonal inventory costs or to take on costly projects with high payoff. As convenient as these loans can be, they can also be very expensive, with some loans carrying APRs up to 99%. You can compare short-term business loan offers (as well as a variety of other small business loans) with LendingTree, our parent company.

Before resorting to lenders that require extortionary interest rates or difficult terms, look into SBA Express Loans. These loans have a maximum interest rate of 10.75% (for loans less than $50,000) and offer terms up to seven years. The SBA backs these at 50 percent, so you’ll only need to come up with collateral for the remaining 50 percent of the loan. You can use Lender Match from the SBA to find local lenders that may help you qualify for a loan.

Additionally, the companies below offer short-term loans, and they have specific programs that help female business owners qualify for the loans. We’ve listed their criteria for all business loans, not just short-term loans.

Equity Financing Opportunities for Women

Equity financing means that you’ll sell shares of your company in exchange for cash. Generally, privately held companies will look to angel investors for their first rounds of equity financing and venture capital firms for large-scale financing.

Angel investors and venture capital firms want to invest in firms with high revenue, potential to scale, and a strong balance sheet.

The process for getting venture capital is not easy, especially for women. According to an analysis by TechCrunch, just 10 percent of all venture capital dollars went to businesses with at least one female founder. On top of that, only 7 percent of partners at the top 100 venture capital firms were women.

McLay, of the Financial Gym, explains her journey to getting venture capital money: “I used my own money for the first two years of my company, but by 2015 I ran out of my own money and started looking for outside investors. I tried working with some of the women-only venture capital firms, but I got the feedback that my brand wasn’t sexy enough. Ironically, even though 95 percent of the traffic at the gym is women, my first angel investor was actually a man.”

Below are some firms that focus on funding companies with at least one female founder.

Angel investors

Angel investors are typically the first equity investors to fund a company. Angel investors invest their own money into startups. Since it’s their money on the line, angel investors tend to be highly motivated to see a business succeed, though they expect many of their investments to fail.

These are a few prominent angel investing groups that focus on funding women-owned businesses:

37 Angels: 37 Angels allows eight companies to pitch to them every two months. Founders receive $50,000 to $150,000 in seed money. The majority of companies funded by 37 Angels are technology or consumer packaged goods companies. Apply for the pitch through Gust.

Women’s Capital Connection: Women’s Capital Connection works with female founders in the Midwest region. The company has invested in 14 companies since 2008. Many of the companies receiving funding have a health and wellness focus. Learn more about their funding process here.

Pipeline Angels: Pipeline Angels is a coalition of women and nonbinary femme investors looking to change the world through business. They host annual pitch summits around the United States. Applying for the pitch summit costs $40. You can learn more about the schedule and opportunities to pitch through Pipeline Angels’ pitch summit schedule.

Built by Girls Ventures: Built by Girls Ventures (BBG) backs early stage consumer tech and consumer internet products.Your company needs at least one female founder to be considered by BBG. They back companies that already have some market traction, and their investment is generally between $100,000 and $250,000. Most BBG investments come through personal introductions, but you can pitch to BBG via their email hello@bbgventures.com.

Venture capital firms

Venture capital firms invest in established companies with room for profitable scaling. These firms invest in many startups and generally provide larger investments than angel investors.

These are a few venture capital firms that focus on funding businesses with at least one female founder.

Women’s Venture Capital Fund: The Women’s Venture Capital Fund invests in digital media companies and companies with a focus on sustainability. The fund focuses on women-owned businesses in the Pacific Northwest and California.

Female Founders Fund: The Female Founders Fund invests in e-commerce and web-enabled services. They look for women-run businesses with a proven track record and an opportunity to scale. You can pitch to them by sending a deck with relevant materials to hello@femalefoundersfund.com.

Aspect Ventures: Aspect Ventures funds early-stage tech companies and helps founders fundraise in later-stage funding rounds. Aspect isn’t entirely focused on female founders, but they have a track record of funding businesses founded by women.

Alternative Business Financing Options to Consider

Small business grants for women

When it comes to funding, business grants sound like a great way for women to get a venture off the ground. However, business grants tend to be competitive and offer relatively small sums. A few grants offer recipients more than $100,000, but those are the exception. Most offer less than $5,000 per recipient.

Despite the small sums, grants offer other advantages. Business owners who win grants can use them for publicity or to gain credibility in the local business community.

These are a few national grants that female business owners can consider.

The Eileen Fisher Women-Owned Business Grant Program: Women-owned and -led companies with revenues less than $1 million may qualify for a grant of at least $10,000. Companies must have founding principles of social consciousness and innovation. Grants are awarded to the companies that have a clear development path and need for the funds.

Check the website in spring 2018 to start applying for the next round of grants.

WomensNet Amber Grants for Women: Women with business ideas can receive a $500 grant to move their idea forward. You don’t need a formal business plan to win, you just need to share your idea with WomensNet.

WomensNet issues a grant every month. Among the 12 grant winners each year, one woman will be awarded an additional $1,000 for her business. You must pay a $7 fee to apply.

InnovateHER: The SBA Office of Women’s Business Ownership sponsors this challenge. The competition gives entrepreneurs the opportunity to pitch products that will help the lives of millions of women. The top three competitors win grants between $10,000 and $40,000. In previous challenges, applications were open from January through early June.

Cartier Women’s Initiative Awards: The Cartier Women’s Initiative Awards is a worldwide business plan competition designed to support female entrepreneurs. Applicants’ businesses should be in their second or third year, and leaders must have a plan to take their company to the next level. Each year, a panel selects three finalists from six global regions. One finalist from each region will win a grant of $100,000, and the remaining 12 finalists will win a $30,000 grant.

Female business owners can apply every year from January through August.

Additional resources for female entrepreneurs

This is merely a collection of financing opportunities that give female business owners special consideration. There are many more types of small-business financing available to all kinds of entrepreneurs, not just women, like non-SBA-backed loans of various terms, working capital loans, receivable financing, and equipment loans.

When it comes to starting and growing a business, the best resources aren’t always financial. Female business owners should look into some of the programs offered by their local Women’s Business Center, which are organizations sponsored by the Small Business Administration. Women’s Business Centers connect female entrepreneurs with the people and resources they need to grow their businesses.

The post Guide to Small Business Funding for Women appeared first on MagnifyMoney.

How to Save Big on Your Back-to-School Shopping

It's easy to overspend at World Market but with these ways to save, you can breathe a sigh of relief when checking your receipt.

Back-to-school season generally starts around two months before the beginning of school—so if you haven’t started yet, you’re already behind. What once required a few Dixon Ticonderoga pencils and a notebook now requires carts full of supplies. In 2016, the National Retail Federation estimated that families with children in grades K–12 would spend an average of $673 on clothes, accessories, school supplies, electronics, and shoes during the back-to-school season. Based on robust wage growth, I expect that number to increase for 2017.

While most parents will take advantage of some sales during the back-to-school season, you can save more by identifying the right time to buy. As an industry insider, I can give you the tips you need to save on back-to-school shopping.

Back-to-School Clothes

A lot of people are shocked to learn that clearance sales aren’t necessarily the best time to buy clothes. When the items go on clearance, the first markdown will generally be in the neighborhood of 20ؘ%–30%. On the other hand, retailers will regularly mark down items 40% during a one- to two-week sale.

The only clothes you want to buy on clearance are those that will go beyond a store’s first markdown. Unfortunately, markdown rates are set on a store-by-store basis according to inventory levels and can be difficult to predict. As a result, I don’t risk waiting for deep clearance discounts.

Instead, take advantage of seasonal sales for the best results. The deals vary by category, so I give some specific guidance of finding the best clothing deals.

Uniforms

Major clothing retailers will often advertise an annual “uniform sale.” This sale takes place a few weeks before private schools reopen in your area. Start watching weekly ads the week following the Fourth of July to be sure you catch the deals.

During their uniform sales, major retailers (especially Kohl’s, Macy’s, Target, and Walmart) offer huge discounts on khakis, polos, and black pants. You’ll want to buy enough during the sale to last the whole year.

When I worked in retail, savvy parents with kids in private school would often buy two to three different sizes during uniform sales. That way, they didn’t have to pay full price when their kid inevitably grew during the school year.

By the way, public school parents should pay attention to these sales, too. They are the people who get caught paying full price for Dockers when their kid has to wear black pants for a holiday band performance.

Summer Styles

Summer styles typically go on sale in May and June, and they tend to go to clearance by early July. After the first day of school, your kids will probably spend weeks or even months going to school in shorts and T-shirts (depending on where you live), so you may want to supplement your school wardrobe with summer fashion choices that go on sale during those earlier months.

You won’t find sales on summer styles during back-to-school shopping, but you might find some decent clearance items. Remember, the first markdown on clearance is usually in the 20%–30% off bracket.

That’s not a great deal, and you’ll probably find fall fashion sales with lower-priced options. However, if you see an item for 50%–60% off the original price, it’s a good deal and worth buying if it fits your clothing needs. An item for 70%–75% off retail will generally be out of the store in a week or two, so snap that deal up immediately.

Steep discounts on clearance items don’t mean the product has quality issues. It just indicates that the product didn’t sell well at that particular store. Most stores have limited return policies on clearance items, however, so be sure you know the policy before you buy the item.

Fall Styles

Fall styles typically start to go on sale in mid-July. Kids and teens who like shopping at name-brand stores should watch out for “annual denim sales,” which typically happen in early August. Certain denim styles stay on the market year round, making this the best time of the year to buy jeans.

In general, it’s best to skip most other “fall style” pieces until winter. The most popular fall styles will stick around until November, when you can scoop them up at significant discounts during the holiday discount season. The exception to this rule would be any BOGO (buy one, get one) deals that make sense for your kids’ fashion needs.

Backpacks and Lunchboxes

The new school year means a new backpack and lunchbox, right?

If your kid is still young enough to want cartoon characters or superheroes on their backpack and lunchbox, then a back-to-school sale will yield the best prices. These backpacks usually won’t stick around after September.

Likewise, you can find deals on insulated lunchboxes (which are also appropriate for adults who brown-bag). Buy during the back-to-school sale, and you’ll thank yourself later. While most retailers will stock a few extra lunchbox styles during the peak season, you shouldn’t expect to find these on clearance. Most stores stock just enough lunchboxes to get through the back-to-school rush.

However, teen and adult backpacks are a totally different story. Sporting goods stores will put these on a steep discount during the November and December holiday season. You also may see deals on camping backpacks in April and May. This is one purchase that is worth putting off if you can.

Electronics

One thing I can’t stand is when I see parents buying new electronics for the upcoming school year. Yes, retailers will discount computers, calculators, and the like for the “back to college” rush, but waiting just a few months can save huge coin. So when should you buy?

Calculators

If you’ve got a middle or high school student, they will probably need a TI-83+ for their math class. This is something that you should buy used, preferably in May or June when college graduates are unloading theirs for rock-bottom prices.

If you must buy new, June is the time to do it. Some online retailers will try to compete with the used market by dropping their prices. Set up a notification on CamelCamelCamel.com, and you’ll find deals around $75.

Laptops

College students who want to buy Apple products should shop online or at the Apple Store for the best deals. Usually, Apple will provide student warranties, extra software, or other bonuses during late July and August. Apple doesn’t usually drop its prices, but the bonuses can be worthwhile. Netbooks and other lower-capacity laptops tend to see rock-bottom prices during Black Friday sales in late November.

Generic School Supplies

Ten-cent folders and crayons for a quarter? Deals like these will start rolling in about four to five weeks before schools start. Watch weekly ads to find the local loss leaders (a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services), and buy them right away. If you’re feeling extra generous, stock up on generic school supplies and donate them to your local school. The teachers will thank you for saving their pocketbooks.

Back-to-school shopping doesn’t have to deplete your bank account. In fact, some credit cards will even offer rewards for back-to-school shopping. But before you apply for a card—which could ding your credit when the card provider checks your score—make sure you’ve got the requisite credit by checking your credit report for free at Credit.com.

Hannah L. Rounds is a contributor at CentSai, a financial wellness community for millennials and Gen Xers. She loves talking and writing about the counterintuitive intersections between marriage, family, money, and careers. In addition to “geeking” out over personal finance, she loves cooking, reading to her son, snowboarding, and watching superhero shows on Netflix.

Image: Eva-Katalin

The post How to Save Big on Your Back-to-School Shopping appeared first on Credit.com.

How to Get a Car Loan With Bad Credit in 2017

Part I: Auto Loan Options for Bad Credit

Shopping for vehicles with bad credit can be like walking through a minefield. It is possible to get across safely and into the car of your dreams, but it will require careful thought and strategy if you want to avoid overpriced lemons, crooked loans and outright fraud.

In this guide, we explain how to find the best deal on an auto loan if you have bad credit. We dig into the pros and cons of financing through credit unions, banks, personal loans and dealers. Finally, we bring to light the biggest auto financing scams and show you how to avoid them.

We geared this guide toward young adults with a short credit history; immigrants who have not established credit; anyone with a history of late payments, credit collections and bankruptcy; and someone who has suffered from identity theft, divorce or other negative credit events.

How bad credit impacts your cost of borrowing

When you have poor credit, it will be harder for you to find affordable auto financing but not impossible. You should be prepared to face higher interest rates, for one thing, and you may be required to have a co-signer or put down a larger down payment in order to get approved.

Most people think of their credit score as a single number, but when it comes to auto lending, that’s not entirely true. Most auto lenders care a lot more about your history with auto loans than about any other part of your credit history.

A good credit score isn’t just about interest rates. Bad credit may mean that you’re ineligible for a loan at any interest rate. The single most important factor in getting approved for an auto loan is whether or not you’ve had a repossession in the last year. People with recent repossessions will struggle to find a reputable lender. During bankruptcy proceedings, you may struggle to find financing.

However, shortly after completing bankruptcy, you’re likely to get flooded with auto loan offers. Lenders know that you can’t file bankruptcy for another eight years, so they may consider you a better credit risk.

If you have bad credit, you might find a lender to approve your loan, but you’ll likely pay a high interest rate. Just how much does bad interest cost? A borrower with a credit score below 500 will expect to pay $9,404 for a $16,000, 61-month car loan, according to interest rate estimates from Experian. That’s 4.1 times the interest that a prime borrower can expect.

People with bad credit face dramatically higher interest rates than borrowers with good credit. According to the Experian State of the Automotive Finance Market, used car borrowers with credit scores between 601 and 660 had average interest rates of 9.88% compared with the 16.48% rate faced by borrowers with scores between 501 and 600.

With such high interest rates, it’s usually best to avoid taking out an auto loan until you have decent credit. However, if you finance a car with bad credit, try to follow these rules:

  • Use a significant down payment. We recommend putting down at least 20 percent on any vehicle purchase. A larger down payment not only results in a smaller loan, but you’ll pay less in interest over time. Additionally, cars depreciate in value rapidly once you purchase them. By putting down 20 percent, you’re making sure you’re only financing what the car is actually worth.
  • Do your research first. Consult the Kelley Blue Book to determine the vehicle’s value, and have the vehicle inspected by a trusted mechanic before you buy it.
  • Avoid loan terms that are longer than four years. The average subprime borrower purchasing a used vehicle takes out a loan for over five years (61.6 months), according to Experian. Long loans may mean you’ll pay more in interest and possibly face costly repairs before you finish paying off the car.
  • Borrow only what you can afford to pay back. A good rule of thumb to follow is that the total cost of your monthly car expenses shouldn’t be more than 10 percent of your gross monthly income
  • Demand fair terms. If you have bad credit, you can’t expect a great interest rate on your loan, but you can expect fair terms. Don’t accept a loan with prepayment penalties or mandatory binding arbitration clauses.

These rules can help you protect yourself against predatory lenders and unaffordable loans.

Credit union auto loans for bad credit

The fastest growing issuers of auto loans are credit unions. According to Experian, at the start of 2015, credit unions held just $215 billion in open auto loans. Today they hold $286 billion.

Navy Federal Credit Union and USAA are two national credit unions that will work with people who have bad credit. Please note, neither credit union guarantees loan approval. However, they both offer courses to help you improve your credit, and they have car-buying programs to help you find a vehicle in your budget.

Navy Federal Credit Union

  • Down payment required: None
  • Loan terms: 12 to 96 months on new vehicles; up to 72 months for used vehicles
  • Credit score requirements: No minimum score. More likely to be approved if you have a low debt-to-income ratio and few major derogatory marks (such as collections or repossessions).
  • Full review

Navy Federal Credit Union is open to members of any branch of the U.S. military, civilian and contractor personnel, veterans and their family members. They do not have specific credit minimums for their loans, but they consider debt-to-income ratios and credit history.

Unlike most banks, NFCU will help you if you have negative equity in a vehicle. They lend up to 125 percent of the new vehicle’s value. Navy Federal Credit Union approves borrowers for both private party and dealership loans, and they have free online courses to help you make the best buying decisions.

USAA

  • Auto loan APR: 7.74% and up for borrowers with poor credit
  • Down payment required: Varies based on credit history and income
  • Loan terms: 12 to 72 months for borrowers with poor credit
  • Credit score requirements: Not available

USAA is open to members of any branch of the U.S. military and their family members. USAA determines loan eligibility based off of your credit history, your income, and your other debt obligations. You may not qualify for a loan if you have a credit score below the mid 500s, a recent repossession, or other derogatory marks.

USAA does not always require a down payment for a vehicle purchase, but they advise putting down at least 15 percent on vehicle purchases.

Banks and subprime auto financing companies

It’s getting much tougher for people with poor credit to borrow high-interest, high-risk subprime loans, as many of the largest banks in the U.S. have started to shy away from the product.

Ally Financial, the nation’s largest auto lender, limited their subprime lending to just 11.6 percent of their total lending in 2017. In 2015, the nation’s third largest auto lender, Wells Fargo, announced their intentions to limit subprime auto lending to less than 10 percent of their portfolio.

Of the five largest auto lenders in the U.S., only Capital One continues pursuing the subprime auto market. They lend nearly one-third (31%) of their portfolio to consumers with credit scores less than 620.

You can gain pre-approval before you start shopping for a vehicle. This is the best way to shop for an auto loan if you have bad credit. You do not want to pursue auto financing from the scam artists at a dealership.

Below, are auto financing companies and banks that will issue loans directly to people with poor credit.

SpringboardAuto.com

  • Loan size: $7,500 to $45,000
  • Interest rate: 8% to 18%
  • Loan terms: 24 to 69 months
  • Down payment required: Minimum $250
  • Credit score required: 500
  • Vehicle requirements: 2009 or newer, mileage less than 125,000

SpringboardAuto.com is a direct-to-consumer, online auto lending platform. SpringboardAuto.com specializes in loans to people with imperfect credit histories. SpringboardAuto.com uses a soft credit inquiry to determine your loan eligibility. A soft inquiry allows you to shop for a vehicle loan without hurting your credit.

RoadLoans.com

  • Loan size: $5,000 to $75,000
  • Interest rate: Up to 29.99%
  • Loan terms: 12 to 72 months
  • Down payment required: Dependent on multiple credit factors.
  • Credit score requirement: There is not a minimum score required, however applicants are required to complete a credit application. Credit score is not the sole factor, but it plays a key role in determining approval and loan terms.
  • Income requirement: $1,800 monthly minimum income

RoadLoans.com is a company owned by subprime auto lending giant Santander. Santander has suffered from more than its fair share of criticism in the subprime auto lending market. According to a March report by Moody’s Investors Service, the bank failed to verify incomes of 8 percent of borrowers whose loans it later bundled up into bonds and sold to investors. From a consumer’s perspective, it’s important that lenders verify your income before approving you for a loan because it’s never a good idea to borrow more money than you can reasonably afford to repay.

The scandals make this a reluctant recommendation, but the loans offered by RoadLoans.com are direct to consumer. That means you’ll see better rates and fair terms on the loans.

Capital One

  • Loan size: $7,500 to $40,000
  • Interest rate: 3.24%+
  • Loan terms: 36 to 72 months
  • Vehicle requirements: Must work with one of 12,000 nationwide dealerships. Vehicle must be a 2005 model or newer with less than 120,000 miles.
  • Down payment requirement: Must have a 10 percent down payment
  • Income requirement: $1,800 per month
  • Full review

Of the five largest bank lenders, only Capital One continues to expand their subprime auto lending operations. Capital One uses a soft credit pull to help you understand how much you may qualify for. Once you qualify for a loan, Capital One issues a “blank check,” which you can fill out at one of over 12,000 nationwide dealerships.

Autopay.com

  • Loan size: $2,500 to $100,000
  • Interest rate: 1.99% to 22%
  • Loan terms: 24 to 84 months
  • Credit score requirements: 600 minimum score
  • Income requirements: $2,000 month income

Autopay.com is an online lender that specializes in auto lending for people with fair credit. You need a credit score of at least 600 and an income of at least $2,000 a month to qualify for a loan on Autopay.com.

How to compare auto loan rates

Once you’re serious about car shopping, take some time to get the best auto financing. When you apply for an auto loan, you’ll usually see a “hard credit inquiry” on your credit report. This will drag your credit score down by a few points. To limit the damage of hard credit inquiries, do all your comparison shopping inside a 30-day window. Any auto loan applications that you submit within 30 days will count as just one hard credit inquiry on your score.

Get pre-approved for an auto loan

Once you know your numbers, you might think it’s time to start car shopping, but that isn’t quite right. It’s important to get pre-approved for an auto loan first.

Loan pre-approval allows you to walk into a car-buying situation knowing that you’re looking for price and quality, not financing. It frees you to focus on the final price of the vehicle and the value of your trade-in. Even more important, pre-approval can keep you from getting scammed by shady dealers.

If you’re planning to buy from a private-party seller, pre-approval is even more important. Most individuals won’t wait around for weeks or months for financing to come through. Without a pre-approval, you’re unlikely to get the deal.

Using personal loans for auto financing

If you’ve had a car repossessed in the last few years, you may struggle to qualify for any auto loans. But you may still qualify for a personal loan. This is one of the few situations where a personal loan makes sense to finance a car.

Personal loans also make sense if you expect to pay off the loan in less than a year. For example, you may want to take out a loan as a “bridge loan” while you work out the private party sale of a vehicle. If you’re underwater on a vehicle, you may need a personal loan to help you pay off your original loan upon the sale of your older vehicle.

Most people using personal loans will want to look for an unsecured personal loan. Unsecured means that you don’t have an asset to back up the value of the loan. Interest rates on unsecured personal loans tend be higher than those of auto loans. If you have bad credit, the interest rates can be as high as 36%, according to the MagnifyMoney comparison tool.

If you own an insured vehicle, you may consider a secured personal loan. These also have high interest rates, but those are somewhat tempered by the collateral. Of course, if you sell your vehicle or otherwise ruin it, you have to repair the vehicle or pay back the loan right away.

These are some of the best options for personal loans if you have bad credit:

Avant

  • Amount: up to $35,000.
  • Rates: 9.95% to 35.99%
  • Loan terms: 24 to 60 months
  • Upfront fee: 0.95% to 4.75%
  • Full review

Avant specializes in unsecured personal loans for people with OK to bad credit. The interest rates are high, but these are one option for people with bad credit. We recommend these loans if you’re borrowing a small amount or for a short time and you cannot qualify for better terms.

OneMain Financial

  • Loan size: $1,500 to $25,000
  • Interest rates: 15.99% to 35.99%
  • Loan requirements: May require a vehicle as collateral or a co-signer (or both)
  • Full review

OneMain Financial specializes in secured loans for people with bad credit. The loans carry super-high interest rates, but they may be the best rates available if you have bad credit. When you apply for a loan through OneMain Financial, you must complete the loan in a local bank branch.

Best Egg

  • Amount: Up to $35,000
  • Rates: 5.99% to 29.99%
  • Term: up to 60 months
  • Upfront fee: 0.99% to 5.99%
  • Full review

Best Egg is one of our highest rated personal loans for avoiding fine print. If your credit score is at least 660, you could get approved. It is very difficult to get approved below 660.

apply-now

The truth about dealer financing

Even with the best credit score, dealer financing is rarely a good deal. This is especially true if you buy a vehicle with an in-house loan office that claims, “No Credit, No Problem!”

Used car dealerships only work with a few auto lenders, so they can’t guarantee that you’ll get a great rate. On top of that, some auto financing companies let dealerships mark up the loan and keep the additional interest as a commission.

Even in the best-case scenarios, dealer financing can also get you focused on the wrong numbers. Salespeople will focus on the monthly payment amount rather than the price of the vehicle you’re buying and the value of your trade-in. To get the best possible deal, you want to know the price you’re paying for the vehicle.

Part II: Shopping for Auto Financing With Bad Credit

  • Infographic: Essential Car-Buying Checklist

  • Check your credit score
  • Compare rates from several lenders and get pre-approved BEFORE going to the dealer
  • Follow the 20/4/10 rule: Put at least 20% down; finance the car for 4 years or less; car payments should be less than 10% of your monthly budget.
  • Check used cars for safety recalls (run the VIN at SaferCar.gov)
  • Have a trusted mechanic inspect the vehicle
  • Check Kelly Blue Book for price comparisons
  • Negotiate the vehicle price
  • Don’t waste your money on extended warranties
  • Buy insurance on your own
  • Complete the sale (at a local DMV if possible)
  • Transfer the title right away

4 numbers to check before you buy a car

If you’ve struggled with credit in the past, or you’re a new borrower, then you need to know your numbers before you shop for a vehicle. Knowing these numbers will help you make a wise purchasing decision.

  • Credit score
    • You can check your credit score for free from a number of websites. The scores you see on the free websites won’t exactly match the scores auto lenders use. They will use FICO® Auto Scores 2, 4, 5, 8, 9, which can be purchased from myFICO.com for $59.85. Don’t like what you see? Don’t hire a shady “credit repair” company. Our ebook will explain how to repair your credit on your own, for free!
  • Interest rates
    • Many banks and credit unions use soft credit inquiries to help you estimate your auto loan interest rates. You can compare rates at Lendingtree.com to see what rates you might qualify for.
  • Your budget
    • We recommend following the 20/4/10 rule: Put at least 20 percent down, finance the car for less than four years, and have a payment of less than 10 percent of your income. You can use the Auto Affordability Calculator to help you determine a budget.
  • Current car’s value
    • If you’re driving a paid-off car, you have an asset that can go a long way in making your new car more affordable. Many dealerships will let you trade in your old vehicle as a down payment on a newer vehicle. Use Kelley Blue Book to negotiate a fair trade in value.

Dealer financing scams and how to avoid them

“No credit? Bad credit? No problem!”

When you shop for credit at a place that advertises, “No Credit? No Problem!” the financiers smell desperation. They may stick you with a bad loan, or they may outright break laws. These are just a few scams you might encounter from dealer financing operations. According to Consumers for Auto Reliability and Safety (CARS) Foundation president, Rosemary Shahan, “In general, buy-here pay-here financing is just overpriced junk. […] We always recommend that people avoid financing at the dealership. There are just too many games that they can play.”

Yo-yo financing

Yo-yo financing is when dealers allow you to sign a contract at one rate, and then unilaterally change the terms of the contract a few weeks after you’ve taken home the vehicle. They usually claim that the “financing fell through” and you need to sign a new contract at a higher interest rate. This is an illegal practice, but it may require costly litigation to prove.

To protect yourself, keep copies of all loan documents you sign, and don’t drive away with a car until you’ve paid for it.

Mandatory binding arbitration clauses

Most dealer financing includes forced arbitration clauses. In this clause, customers waive the right to a jury trial and must settle disputes in private arbitration. Dealers can delay arbitration or fix outcomes by paying private companies.

Shahan claims, “When you go to arbitration, you’re almost always going to lose. The companies have them in their pockets.”

Overpriced extras

Some loan officers stuff contracts with overpriced extras with dubious value. For example, they may include service contracts, extended warranties and unclear fees. When you do the math on these products, they’re rarely worth the money.

If you plan to take out a loan for more than your car is worth, you may have to buy Guaranteed Auto Protection (GAP) Insurance. This insurance covers the difference between the amount of your loan and the value of your car. It helps you pay off your loan if your car gets totaled. Generally, you’ll want to buy this (and all other car insurance) on your own.

Undervalued trade-ins

Your old vehicle is an asset, and you should get close to Kelley Blue Book value for it. Some shady dealers will value your vehicle at pennies on the dollar. Because of a low valuation, you may be stuck financing a larger amount. A private sale will always yield the biggest bang for your buck, but that might be inconvenient for you. Even so, you need to negotiate for a fair trade in value.

Focus on the monthly payments

Salespeople often focus on monthly payments rather than true affordability. Because of that, you may lose track of the price you’re actually paying for a vehicle. When buying a vehicle, getting a loan pre-approval will help you focus on the price rather than the monthly payment.

Selling mechanically unsound vehicles

Some used car dealers sell vehicles that don’t work to unsuspecting customers. Even worse, some dealerships sell unsafe vehicles that are branded as “certified pre-owned.” Used vehicles can be sold as certified pre-owned despite the fact that they have unrepaired safety recalls.

The Federal Trade Commission requires banks to check for unrecalled safety recalls, but buy-here pay-here lots don’t have to. Unless you check for safety recalls yourself, you might buy a vehicle that the manufacturer has called unsafe.

In general, once you’ve purchased the vehicle, you can’t return it, and you have to pay for repairs on your own. Before you buy a used vehicle, have a trusted mechanic inspect it. Additionally, check the VIN number at SaferCar.gov. This database will tell you if the car you want to buy has unrepaired safety recalls.

Title scams

Some dealers fail to transfer a title within a timely manner. That opens you up to credit and legal risks. Car dealers should explain exactly when you should expect to see the title. Ideally, you can walk out of a dealership with an assigned title or certificate of transfer.

Know your rights

Car buyers do not have many ways to protect themselves from shady dealers or financiers, but if you know your rights, you can protect yourself from the most damaging problems.

  • Title rights. Every state has different rules surrounding title transfers, but in every state you have the right to a title when you purchase a vehicle. You should know exactly when to expect the title before you pay for a vehicle. When you buy from a private party, you should expect to transfer the title immediately regardless of state laws.
  • Insurance rights. A bank may legally require you to purchase vehicle insurance. However, you have the right to purchase the insurance on your own. Take advantage of this right; you’ll save a ton of money.
  • Refuse financing. Despite high-pressure sales tactics, you don’t have to take out financing from a dealer. You can take out a loan from a bank or credit union instead.
  • Contract rights. If you’ve signed a valid contract, a financing company cannot change the terms. They cannot force you to sign a new contract with less favorable terms.

Don’t work with dealers that don’t respect these rights. If you’re caught with a company that does not recognize your rights, complain to the Consumer Financial Protection Bureau right away. The CFPB helps customers connect directly with financial institutions and responds to issues within 15 days.

Since vehicle buyers don’t have many “inherent” consumer protection rights, you protect yourself.

Only work with private parties or dealers that allow you to do the following:

  • Inspect used vehicles
    • A trusted mechanic can help you evaluate the mechanical soundness of a vehicle. Most people cannot tell a lemon from a peach, and they need the help of a mechanic to determine the value of a vehicle.
  • Run the VIN through SaferCar.gov
    • Don’t buy a car that has an unrepaired safety recall. These vehicles are dangerous. If a vehicle has a scratched-out VIN, don’t buy it. It’s too big of a risk.
      Avoid mandatory binding arbitration
  • Avoid mandatory binding arbitration
    • Most loans include a jury waiver clause or an arbitration clause. These clauses keep costs down for the bank, but the clauses are nonbinding. That means you have the right to appeal if you believe the bank or credit union committed fraud. Dealerships and dealer financing often require mandatory binding arbitration. That means you can’t appeal even if the dealer defrauded you with an unsound vehicle or an unclear title or other problems.
  • Pay before you drive away
    • A salesperson should not push you to take home a vehicle before you’ve paid for it. When they do that, they are almost certainly going to stick you with a higher vehicle price, or worse financing terms. Pay for your car first, then drive it away

Understanding your auto loan contract

  • Mandatory binding arbitration – This means you cannot sue your financing company. Instead, all disputes are resolved through a private arbitration company paid for by the dealer. DO NOT work with companies that require mandatory binding arbitration.
  • APR – This is the effective interest rate that you’ll pay on your loan.
  • Dealer preparation fees – Unless a dealer has provided custom preparations for you, this is a bogus fee designed for the dealer to make extra money.
  • Origination fee – This is the fee that the bank charges to originate the loan. It’s usually baked into the cost of the loan.
  • GAP insurance – Guaranteed Auto Protection Insurance covers the difference between the value of your vehicle and the value of your loan. You may be required to purchase this if you have negative equity. However, you can buy this insurance on your own.
  • Extended warranties – An extended warranty means that the manufacturer will cover the cost of repairs for a limited time. Most of the time, the warranties cost far more than the repair costs down the road.
  • Loan term – This is the length of time required for you to pay your loan. We recommend keeping loan terms to less than four years.
  • Loan-to-value (LTV) – The LTV expresses the value of your loan relative to the value of your vehicle. We recommend a starting LTV of 80 percent or less. If you have an LTV greater than 100 percent, then you rolled negative equity into the loan.
  • Negative equity – When your vehicle is underwater (you owe more than the vehicle is worth), you have negative equity. It’s possible to buy a new car with negative equity, but we advise against it.
  • Trade-in value – A vehicle trade-in can help you go a long way toward having a 20 percent down payment for your vehicle. During a trade-in, a dealer pays you for your old vehicle. You can almost always get more money by selling your vehicle in the private market, but it’s not very convenient. A dealer will make a trade-in offer that you can either accept or reject. Use Kelley Blue Book to determine whether you’ve received a fair trade-in value for your old vehicle.

Getting a co-signer for an auto loan

People with bad credit stand to gain a lot from having a co-signer on their auto loan. You can expect to qualify for a larger loan with lower interest payments, but asking someone to co-sign an auto loan is no small request.

A co-signer agrees to make your car loan payments if you are unwilling or unable to fulfill your loan obligations. If you skip a loan payment, you ruin your co-signer’s credit. For that reason, we generally discourage most people from becoming a co-signer. However, spouses who share finances may find that co-signing the loan is helpful for the family finances.

A co-signer can help you qualify for lower interest auto loans by providing one of three attributes:

  • Their income may help you meet the minimum requirements for an auto loan.
  • Their credit history is better than yours.
  • They have a lower debt-to-income ratio than you.

If you’re a freelancer or small business owner, a co-signer may also offer the required income stability that puts you into a lower risk category.

When you ask someone to co-sign a loan, remember that they are putting their credit on the line for you. If you don’t think that you can make your loan payments, then you’re putting them at risk. Be careful about the request

How to refinance from a bad credit auto loan

If you’ve taken out a high-interest auto loan, you should be on the lookout for refinancing opportunities. Most people who make on-time auto loan payments and reduce their credit card debt will find their credit score increase over time. If you’re starting with a very bad credit score, you can see over a 100-point improvement within 12 to 18 months of good credit behavior.

Once your credit score is in the mid 600s, take a serious look at refinancing opportunities. People with credit scores between 601 and 660 paid an average of 9.88 percent on used auto loans, a full 6.6 percent lower than the rates paid by people with subprime credit.

Refinancing an auto loan is easy compared to shopping for initial car financing. That’s because the shopping process includes known variables. You know the value of your vehicle and the amount of financing you’ll need. You also know the interest rate you need to beat. If your current vehicle is underwater (you owe more than your car is worth), you may need to bring cash to the table to complete a refinance.

We recommend shopping for loan refinances through our parent company, LendingTree. LendingTree compares dozens of auto refinance offers all at once and shows you the best rates in the market. You can also compare offers to those you might find through myAutoloan.com or SpringboardAuto.com.

Part IV: Car shopping FAQ

Before you declare bankruptcy, you can buy a vehicle up to the motor vehicle exemption amount in your state. Unless the vehicle is expensive, you’ll probably get to keep the car during bankruptcy proceedings. However, your auto loan won’t be discharged in bankruptcy. You need to pay the auto note as required. If you include an auto loan in bankruptcy proceedings, you won’t be allowed to keep the vehicle.

Most people struggle to find auto financing after they’ve declared bankruptcy but before the bankruptcy is discharged. Courts even frown upon buying a car with cash during bankruptcy.

Once your bankruptcy is discharged, you can expect subprime lenders to flood your mailbox with auto loan offers. This is because lenders know you can’t declare bankruptcy for another eight years. However, it’s not necessarily a great time to finance a vehicle. Waiting a year or two for your credit to repair will allow you to finance a vehicle at a much lower interest rate.

If you don’t get approved for an auto loan, ask the bank why they didn’t approve you. Do you have insufficient income? Do you have a recent auto repossession on your credit report? Do you lack credit history? Perhaps your debt-to-income ratio is too high.

Once you know why you didn’t get the loan, you can work on fixing the problem. This guide can teach you how to improve your credit score for free. It’s also important to note that just because one bank didn’t approve your loan, doesn’t mean you can’t get a loan. Our parent company, LendingTree, helps consumers shop for multiple loans all at once. Using LendingTree or other loan aggregation sites can help you find a bank willing to lend to you.

Of course, you could resort to dealer financing, but we don’t recommend it, even as a last resort.

Some banks will not lend to you unless you have a co-signer (also known as a co-applicant). The co-signer agrees to pay for your loan if you stop making payments. If you have low income and bad credit, you’ll probably need a co-signer. However, most others can get around having a co-signer. If possible, we recommend avoiding loans that require a co-signer.

If you currently own a car, you can opt to trade in your vehicle at a dealership. When you trade in your vehicle, the dealership offers credit against the purchase of a newer vehicle. Many people use trade-ins in lieu of down payments.

Dealerships offer less money for a trade-in than you would get in the open market. However, private sales can be complex, and they often take a long time. Because of that, trade-ins can be a win-win for dealers and buyers. The key to a winning trade-in is not getting ripped off. Use Kelley Blue Book to determine your vehicle’s value, and use the KBB value to negotiate a fair trade-in price.

If you owe more than your car is worth, you need to be extra cautious about a trade-in option. When you trade in a vehicle with negative equity, you’re automatically starting your new loan underwater. To stop the cycle of negative equity, you need to find a vehicle that you can pay off in less than four years.

Most people cannot tell the difference between a high-quality and a low-quality used vehicle. We recommend paying a trusted mechanic to inspect the vehicle before you buy it. If a seller won’t let a mechanic inspect the vehicle, you don’t want to buy from them.

You should also personally check the nationwide vehicle registry to be sure a vehicle does not have any unrepaired safety recalls. If the vehicle has unrepaired safety recalls, don’t buy it. It’s not safe to drive.

The post How to Get a Car Loan With Bad Credit in 2017 appeared first on MagnifyMoney.

Under Pressure: 1 in 5 American Parents Will Go into Debt to Send Kids Back to School

After a long summer break, many parents feel eager to send their kids back to school. But back to school can translate into debt, according to a recent MagnifyMoney national survey of more than 700 parents. More than one in five parents will go into debt to pay for back-to-school expenses. And more than half (55 percent) of parents who are going into debt say they feel pressure to buy new things for their kids during the back-to-school time compared to just 29 percent for parents not going into debt.

It’s no question that back-to-school clothes, supplies, and gear can put a dent in a family’s budget. Almost three in four parents will spend more than $100 on back-to-school supplies this year, and nearly one in four will spend more than $500.

Key insights

  • 55% of parents who are going into debt say they feel pressure to buy new things for their kids for back to school (versus 29% for parents not going into debt)
  • Almost half (44%) of parents are spending over $300 on back to school.
  • Midwest parents are least likely to feel pressure to buy new things for their kids (30%) compared to 43% in the Northeast and 38% in the South and West.
  • Parents in the South are most likely to spend $500 or more on back to school (28%) compared to 25% in the Northeast, 20% in the Midwest, and 21% in the West.
  • 41 percent of parents who feel stress about back-to-school shopping expect to go into debt for back-to-school shopping.
  •  Just 36 percent of parents who will go into debt feel the cost of school supplies required is reasonable. 52 percent of parents who don’t expect to go into debt for back-to-school shopping feel the cost is reasonable.
  • 65 percent of parents going into debt plan to spend $300 or more, compared to 38 percent of those not going into debt. And 37 percent of those going into debt plan to spend $500 or more, versus 21 percent of those not going into debt.

Pressure to spend

The survey indicated that for parents expecting to take on debt, back-to-school shopping is fraught with negative emotion. Nearly a third (33 percent) of parents who expect to go into debt for back-to-school shopping feel the cost of expected school supplies is unreasonable. Just one in five parents who won’t go into debt feel the same way. With school supplies pushing one in five families into debt, it’s no wonder that so many feel the costs are unreasonable — that’s especially true for families already carrying credit card debt into the back-to-school season.

According to the 2015 Report on the Economic Well-Being of U.S. Households, 31 percent of American households carry credit card debt all year round, and 27 percent of households carry credit card debt from time to time. A MagnifyMoney analysis showed that households carrying credit card debt have an average balance of $7,700. Adding several hundred dollars to an existing credit card debt can make the whole debt feel unmanageable.

In the survey, taking on debt is one of the leading indicators for feeling back-to-school shopping stress. Parents taking on debt were nearly three times as likely to feel that back-to-school shopping was stressful compared to those who were not. A third of parents going into debt feel that back-to-school shopping is stressful, but just 12 percent of parents not going into debt feel the same.

The stress doesn’t come just from crowded malls and added debt. Instead, it comes from social pressure to take on debt and buy new things for kids. Over half (55 percent) of parents who are going into debt feel pressure to buy new things for their kids during the back-to-school time frame. Less than three in 10 (29 percent) parents who aren’t going into debt feel that same pressure.

The pressure to go into debt for kids doesn’t just occur during back-to-school time. Almost half (46 percent) of all moms admit to going into debt for child-rearing costs, according to the 2015 Cost of Raising a Child survey from BabyCenter.com. The pressure to give kids better lives (and better school supplies) can lead parents to make expensive decisions, including going into debt.

Store cards and debt

Most parents, 93 percent, use traditional credit cards or cash to pay for back-to-school items. Only a small percentage plan to use retail credit cards (like the Target RedCard) to pay for back-to-school items. However, parents going into debt are more than three times as likely to use store credit cards as parents not going into debt (15 percent vs. 5 percent).

With coupons, points, and cash rewards, store credit cards can feel enticing, but the interest rates on store cards are damaging.

Retail credit cards have notoriously high interest rates. Currently, Target REDcard and the Walmart Credit Card have interest rates of 22.9 percent, and the Kohl’s credit card is 24.99 percent.

Financing $300 on a store credit card (with a 22.9 percent APR) means that a parent will spend $38.50 on extra interest if they pay off the loan over the course of the year compared to a regular card.

Real Cost of Back-to-School Spending on Store Credit Cards (22.9 percent APR)

$100 in back-to-school spending $300 in back-to-school spending $500 in back-to-school spending
Paid off in 3 months $103.83 $311.52 $519.20
Paid off in 1 year $112.83 $338.50 $564.17

Source: MagnifyMoney.

Overall, 33 percent of parents use traditional credit cards to pay for back-to-school items, including 37 percent of parents planning to take on debt. These parents will likely yield substantial interest rate savings by choosing to use a traditional credit card rather than a store card. Currently, the average interest rate on a credit card is 14 percent, according to the Federal Reserve Bank of St. Louis, but people with decent credit can find plenty of 0 percent APR interest rate offers.

Avoiding cards and debt

Parents who avoid debt tend to avoid plastic altogether. Over three in five (63 percent) parents who don’t expect back-to-school debt won’t spend on credit or retail cards.

As a group, avoiding plastic seems to keep spending down as well — 62 percent of parents who eschew plastic will spend less than $300 on back-to-school supplies. By comparison, just 53 percent of parents using plastic will spend less than $300.

Only 31 percent of parents who are avoiding debt will spend on a credit card and reap rewards points or cash back options. It might seem like this group is missing out on good deals, but they may just focus their attention on bigger saving opportunities. Two-thirds of parents who won’t use plastic this season will take advantage of back-to-school sales.

Survey methodology

MagnifyMoney.com commissioned Google Consumers Surveys to obtain online survey data with 700 parents living in the United States with children going back to school. Interviews were conducted online via Google Surveys in English during August 5-8, 2017. Statistical results are weighted to correct known demographic discrepancies. The margin of sampling error was plus or minus 5.3 percentage points for the 702 people who said they felt stress during back-to-school shopping.

 

The post Under Pressure: 1 in 5 American Parents Will Go into Debt to Send Kids Back to School appeared first on MagnifyMoney.

Auto Loan Interest Rates and Delinquencies: 2017 Facts and Figures

Led by a prolonged period of low interest rates, consumers now have a record $1.2 trillion1 in outstanding auto loan debt. Despite record high levels of issuance, the auto lending market shows signs of tightening. With auto delinquencies on the rise, consumers are facing higher interest rates on both new and used vehicles. In particular, over the last three years, subprime borrowers saw rates rise faster than the market as a whole. MagnifyMoney analyzed trends in auto lending and interest rates to determine what’s really going on under the hood of automotive financing.

Key insights

  1. Overall auto delinquency is on the rise, and the first quarter of 2017 saw near record volume ($8.27 billion) in new severely delinquent auto loans.54
  2. Interest rates are on the rise, with average new car loan rates up to 5.2%, 93 basis points from their lows in late 2013.2
  3. The average duration of auto loans (new vehicles) is up to 66.53 months. The longer loans make monthly payments more manageable even as interest rates rise.31
  4. The median credit score for an auto loan borrower dropped to 698.6 This broke a five-quarter trend for rising credit scores among auto loan borrowers.

Facts and figures

  • Average Interest Rate (New Car): 5.2%2
  • Average Interest Rate (Used Car): 9.02%3
  • Average Loan Size New: $28,5694
  • Average Loan Size Used: $17,0785
  • Median Credit Score for Car Loan: 6986
  • % of Auto Loans to Subprime Consumers: 34.3%7

Subprime auto loans

  • Total Subprime Market Value: $234 billion8
  • Average Subprime LTV: 113.4%9
  • Average Interest Rate (New Car): 11.35%10
  • Average Interest Rate (Used Car): 16.49%11
  • Average Loan Size (New Car): $27,85312
  • Average Loan Size (Used Car): $16,24013
  • % Leasing: 24.5%14

Prime auto loans

  • Total Prime Market Value: $733 billion15
  • Average Prime LTV: 97.91%16
  • Average Interest Rate (New Car): 3.96%17
  • Average Interest Rate (Used Car): 5.42%18
  • Average Loan Size (New Car): $31,96419
  • Average Loan Size (Used Car): $20,84720
  • % Leasing: 36.5%21

Auto loan interest rates

Interest rates for auto loans continue to remain near historic lows. Interest rates for used cars is now 9.02% on average. The average interest rate on new cars (including leases) is 5.2%. However, the historically low rates belie a tightening of auto lending, especially for subprime borrowers.

New loan interest rates

Consumer credit information company Experian reports that the average interest rate on all new auto loans was 5.2%, up 93 basis points from the trough in the third quarter of 2013.24 Compared to the previous year, interest rates are up 38 basis points for new cars. The interest rate increase reflected underlying tightening in the auto loan market for new vehicles.

During the last few years, lenders tilted away from subprime borrowers. In the second quarter of 2017, just 10.02% of new loans went to subprime borrowers compared with peak subprime lending of 11.48% in the fourth quarter of 2015. The movement away from subprime borrowers led to a smaller increase in new car interest rates.25

Across all credit scoring segments, borrowers faced higher average borrowing rates. Subprime and deep subprime borrowers saw the largest absolute increases in rate hikes, but super prime borrowers also saw an 18-basis-point increase in their borrowing rates over the last year. The average interest rate for super-prime borrowers is now 3.05% on average, the highest it’s been since the end of 2011.27

When comparing credit scores to lending rates, we see a slow tightening in the auto lending market since the end of 2013. The trend is especially pronounced among subprime and deep subprime borrowers. These borrowers face auto loan interest rates growing at rates faster than the market average. Consumers should expect to see the trend toward slightly higher interest rates continue until the economic climate changes.

Even with the tightening, interest rates remain near historic lows for borrowers with fair credit and above. However, the low rates aren’t translating to consumers are paying less interest on their vehicle purchases. The estimated cost of interest on new vehicle purchases is now $4,378,29 up 52% from its low in the third quarter of 2013.

Growth in interest paid over the life of the loan stems from longer loans and higher average loan amounts. The average maturity for a new loan grew from 62.4 months in the third quarter of 2008 to 66.5 months in early 2017.31 During the same time, average loan amounts for new vehicles grew 15.3% to $29,134.32

Used loan interest rates

Over the past year, interest rates for used vehicles swung to their lowest rates ever, but recent movements show that interest rates for used cars may be stabilizing or climbing. Year over year, used car interest rates increased by 5 basis points to 9.02%. The drop in average interest rates came from a dramatic increase of prime borrowers entering the used car financing market. In the second quarter of 2017, 46.91% of used-car borrowers had prime or better credit. The year before, 45% of used borrowers were prime.34

On the whole, borrowers in the used car market face modest increases in interest rates compared to this time last year. Super prime and prime borrowers saw upticks of 27 basis points and 19 basis points, respectively. This brought the average super prime borrowing rate up to 3.68% for used vehicles, and the prime rate to 5.42%.36 Despite the recent increases, interest rates for prime borrowers are still near historic lows.

On the other end of the spectrum, subprime and deep subprime borrowers saw larger than average interest rate increases last quarter. Deep subprime interest rates grew to 19.73%, a 44 basis point increase from the previous year. Subprime borrowers face rates of 16.49% for used cars, up 39 basis points from the previous year. Interest rate hikes for subprime borrowers are part of a broader trend that started in 2009. Since 2009, interest rates for subprime borrowers are up nearly two full percentage points, and interest rates for deep subprime borrowers are up 3.5 percentage points.

Along with interest rate increases, the estimated interest paid on a used car loan sits at $4,279, up $227 from this time four years ago. Rising interest rates factor into the increased interest costs, but they are not the primary driver of interest costs. A more important factor in the total interest cost is the longer average loan terms for used cars (61 months vs. 59 months),38 leading to more interest paid over the life of a car loan.

Auto loan interest rates and credit score

As of June 2017, the median credit score for all auto loan borrowers was 698.40 Following a five quarter increase in median credit scores of auto borrowers, median credit scores fell below 700 for the first time since 2016.

In the second quarter of 2017, just 34.3% of all auto loans were issued to subprime borrowers compared with an average of 35% over the past three years. Ally Financial, the nation’s largest auto lender, limited subprime lending to just 11.6 percent of their auto loan portfolio, and Wells Fargo, the nation’s third largest auto lender, announced intentions to limit subprime auto lending to less than 10 percent of their auto portfolio. Despite the actions of these big banks, trends towards lending to the highest quality auto borrowers may show signs of normalizing near the 35% number again.

Total auto loan volume decreased dramatically between 2008 and 2010. During that time, subprime and deep subprime lending contracted faster than the rest of the market. Since early 2010, auto lending rebounded to near pre-recession levels, but subprime lending lagged in recovery. However, in the last year and a half, subprime lending volume has shown signs of total recovery. In the second quarter of 2017, banks issued $50.9 billion to subprime borrowers, surpassing the average $48.2 billion of subprime auto loans issued each quarter between 2005 and 2007.

Loan-to-value ratios and auto loan interest rates

One factor that influences auto loan interest rates is the initial loan-to-value (LTV) ratio. A ratio over 100% indicates that the driver owes more on the loan than the value of the vehicle. This happens when a car owner rolls “negative equity” into a new car loan.

Among prime borrowers, the average LTV was 97.91%. Among subprime borrowers, the average LTV was 113.40%.44 Both subprime and prime borrowers show improved LTV ratios from the 2007-2008 time frame. However, LTV ratios increased from 2012 to the present.

Research from the Experian Market Insights group46 showed that loan-to-value ratios well over 100% correlated to higher charge-off rates. As a result, car owners with higher LTV ratios can expect higher interest rates. An Automotive Finance Market report from Experian47 showed that loans for used vehicles with 140% LTV had a 3.03% higher interest rate than loans with a 95%-99% LTV. Loans for new cars charged just a 1.28% premium for high LTV loans.

Auto loan term length and interest rates

On average, auto loans with longer terms result in higher charge-off rates. As a result, financiers charge higher interest rates for longer loans. Despite the higher interest rates, longer loans are becoming increasingly popular in both the new and used auto loan market.

The average length to maturity for new car loans in the second quarter of 2017 is 66.5 months.48For used cars, the average is 61.1 months.49 Loans for both new and used cars are now more than six months longer on average than they were in 2009. Based on data from Experian, the increase in average length to maturity is driven primarily by an increasing concentration of borrowers taking out loans requiring 73-84 months of maturity.50

In the second quarter of 2017, just 7.3% of all new vehicle loans had payoff terms of 48 months or less, and 33.8% of all loans had payoff periods of more than 6 years.51 Among used car loans, 17.7% of loans had payoff periods less than 48 months, and an equal number, 17.7% of loans, had payoff periods more than six years.52

Auto loan delinquency rates

Despite a trend toward more prime lending, we’ve seen deterioration in the rates and volume of severe delinquency. In the first quarter of 2017, $8.27 billion in auto loans fell into severe delinquency.54 This is near an all-time high.

Overall, 3.92% of all auto loans are severely delinquent. Delinquent loans have been on the rise since 2014, and the overall rate of delinquent loans is well above the prerecession average of 2.3%.

Between 2007 and 2010, auto delinquency rates rose sharply, which led to a dramatic decline in overall auto lending. So far, the slow increase in auto delinquency between 2014 and the present has not been associated with a collapse in auto lending. In fact, the total outstanding balance is up 36% to $1.19 billion since 2014.57

However, the increase in auto delinquency means lenders may continue to tighten lending to subprime borrowers. Borrowers with subprime credit should make an effort to clean up their credit as much as possible before attempting to take out an auto loan. This is the best way to guarantee lower interest rates on auto loans.

Sources

  1. Quarterly Report on Household Debt and Credit August 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  2. State of the Automotive Finance Market,” New Car Average Rates – Page 25, from Experian.TM
  3. State of the Automotive Finance Market,” Used Car Average Rates – Page 25, from Experian.TM
  4. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, October 2, 2017.
  5. Board of Governors of the Federal Reserve System (US), Average Amount Financed for Used Car Loans at Finance Companies [DTCTLVEUANQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUANQ, October 2, 2017.
  6. Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  7. Quarterly Report on Household Debt and Credit August 2017.” Auto Loan Originations by Credit Score, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  8. Calculated metric: “State of the Automotive Finance Market” Loan Balance Risk Distribution Q2 2017 – Page 5, from Experian,TM and “Quarterly Report on Household Debt and Credit August 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.(3.71% of All Loans Are Deep Subprime + 15.97% of All Loans Are Subprime)X ($1.190 trillion in Auto Loans)
  9. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  10. State of the Automotive Finance Market,” New Car Subprime Average Rates, Page 25, from Experian.TTM
  11. State of the Automotive Finance Market,” Used Car Subprime Average Rates, Page 25, from Experian.TM
  12. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  13. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  14. State of the Automotive Finance Market,” % Leasing By Tier, Page 16, from Experian.TM
  15. Calculated metric: “State of the Automotive Finance Market” Loan Balance Risk Distribution Q2 2017 – Page 5, from Experian,TM and “Quarterly Report on Household Debt and Credit August 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.(41.7% of All Loans Are Prime + 19.74% of All Loans Are Super Prime)X ($1.190 trillion in Auto Loans)
  16. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  17. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (New Car), Page 25, from Experian.TM
  18. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (Used Car), Page 25, from Experian.TM
  19. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  20. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  21. State of the Automotive Finance Market,” % Leasing By Tier, Page 16, from Experian.TM
  22. Graph 1 – Auto Loan Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  23. Graph 2 – Average New Vehicle Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  24. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (New Car), Page 25, from Experian.TM
  25. State of the Automotive Finance Market,” New Loan Risk Distribution, Page 15, from Experian.TM
  26. Graph 3 – % of New Car Loans Issued to Subprime Borrowers, data compiled from historic Experian State of the Automotive Finance Market Reports.
  27. Average Interest Rate by Credit Score, data compiled from historic Experian State of Automotive Finance Reports.
  28. Graph 4 – Average Interest Rate by Credit Score (New Car Loans), data compiled from historic Experian State of Automotive Finance Reports.
  29. Calculated metric: Total Interest over the Life an Auto Loan (New Car).
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, October 2, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October 2, 2017.
    3. Average New Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  30. Graph 5 – Estimated Interest on New Car Loan.
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, October 2, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October, 2017.
    3. Average New Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  31. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October 2, 2017.
  32. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, October 2, 2017.
  33. Graph 6 – Average Used Vehicle Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  34. State of the Automotive Finance Market,” Used Car Loan Risk Distribution, Page 15, from Experian.TM
  35. Graph 7 – Lending By Credit Score Q2 2016 vs. Q2 2017 “State of the Automotive Finance Market,” Used Car Loan Risk Distribution, Page 15, from Experian.TM
  36. State of the Automotive Finance Market,” Average Loan Rates By Credit Tier (Used Cars), Page 25, from Experian.TM
  37. Graph 8 – Average Interest Rate by Credit Score (Used Car Loans), data compiled from historic Experian State of Automotive Finance Reports.
  38. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, October 2, 2017.
  39. Graph 9 – Calculated metric: Estimated Interest on Used Car Loans.
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for Used Car Loans at Finance Companies [DTCTLVEUANQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUANQ, October 2, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, October 2, 2017.
    3. Average Used Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  40. Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  41. Graph 10 – Credit Score at Auto Loan Origination “Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  42. Graph 11 – % of New Loans Issued to Subprime Borrowers. Calculated metric from “Quarterly Report on Household Debt and Credit August 2017.” Auto Loan Originations by Credit Score ((<620+620-659)/Total Lending), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  43. Graph 12 – Auto Loan Origination by Credit Tier “Quarterly Report on Household Debt and Credit August 2017.” Auto Loan Originations by Credit Score, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  44. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  45. Graph 13 – Average LTV at Auto Loan Origination “U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  46. Understanding automotive loan charge-off patterns can help mitigate lender risk,” from Experian.TM Accessed July 17, 2017.
  47. State of the Automotive Finance Market Q4 2010,” Pages 25-26, from Experian.TM
  48. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October 2, 2017.
  49. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, October 2, 2017.
  50. State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  51. Calculated metric: “State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  52. Calculated metric: “State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  53. Graph 14 – Average Auto Loan Length to Maturity (Months).
    1. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, October 2, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, October 2, 2017.
  54. Quarterly Report on Household Debt and Credit August 2017.” Transition into serious delinquency (90+ days): Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  55. Graph 15 – New Severely Delinquent Auto Loans (90+ Days) “Quarterly Report on Household Debt and Credit August 2017.” Transition into serious delinquency (90+ days): Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  56. Graph 16 – % of All Loans Severely Delinquent “Quarterly Report on Household Debt and Credit August 2017.” % of Balance 90+ Days Delinquent: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017.
  57. Quarterly Report on Household Debt and Credit August 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 7, 2017. (Q1 2014 compared to Q2 2017.)

The post Auto Loan Interest Rates and Delinquencies: 2017 Facts and Figures appeared first on MagnifyMoney.

Seniors Are Getting Crushed by Debt, New MagnifyMoney Analysis Shows

More American seniors are shouldering debt as they enter their retirement years, according to a new MagnifyMoney analysis of data from the latest University of Michigan Retirement Research Center Health and Retirement Study release. MagnifyMoney analyzed survey data to see whether debt causes financial frailty during retirement. We also spoke with financial experts who explained how seniors can rescue their retirements.

1 in 3 Americans 50 and older carry non-mortgage debt

The Health and Retirement Study from the University of Michigan Retirement Research Center surveys more than 20,000 participants age 50+ who answer questions about well-being. The survey covers financial topics including debt, income, and assets. Since 1990, the center has conducted the survey every other year. They released the 2014 panel of data in November 2016. MagnifyMoney analyzed the most recent release of the data to learn more about financial fitness among older Americans.

In an ideal retirement, retirees would have the financial resources necessary to maintain the lifestyle they enjoyed during their working years. Debt acts as an anchor on retiree balance sheets. Since interest rates on debts tend to rise faster than earnings from assets, debt has the power to destroy the balance sheets of seniors living on fixed incomes.

We found that nearly one-third (32%) of all Americans over age 50 carry non-mortgage debt from month to month. On average, those with debt carry $4,786 in credit card debt and $12,490 in total non-mortgage debt.

High-interest consumer debt erodes seniors’ ability to live a quality lifestyle, says John Ross, a Texarkana, Texas-based attorney specializing in elder law.

“From an elder law attorney perspective, we see a direct correlation between debt and institutional care,” Ross says. “Essentially, the more debt load, the less likely the person will have sufficient cash assets to cover medical care that is not provided by Medicare.”

Even worse, debt leads some retirees to skip paying for necessary expenses like quality food and medical care.

“The social aspect of being a responsible bill payer often leads the older debtor to forgo needed expenses to pay debts they cannot afford instead of considering viable options like bankruptcy,” says Devin Carroll, a Texarkana, Texas-based financial adviser specializing in Social Security and retirement.

Some older Americans may even be carrying debt that they don’t have the capacity to pay.

According to our analysis, 40% of all older Americans have credit card debt in excess of $5,000. More than one in five (22%) Americans age 50+ have more than $10,000 in credit card debt. On average, those with more than $10,000 in credit card debt couldn’t pay off their debt even by emptying their checking accounts.

Over a third of American seniors don’t have $1,000 in cash

It’s not just credit card debtors who struggle with financial frailty approaching retirement. Many older Americans have very little spending power. More than one-third (37%) of all Americans over age 50 have a checking account balance less than $1,000.

Low cash reserves don’t just mean limited spending power. They indicate that American seniors don’t have the liquidity to deal with financial hardships as they approach retirement. This is especially concerning because seniors are more likely than average to face high medical expenses. Over one in three (36%) Americans who experienced financial hardship classified it as an unexpected health expense, according to the Federal Reserve Board report on the Economic Well-Being of U.S. Households in 2015. The median out-of-pocket health-related expense was $1,200.

Debt pushes seniors further from retirement goals

Seniors carrying credit card debt exhibit other signs of financial frailty. For example, seniors without credit card debt have an average net worth of $120,000. Those with credit card debt have a net worth of just $68,000, 43% less than those without credit card debt.

The concern isn’t just small portfolio values. For retirees with debt, credit card interest rates outpace expected performance on investment portfolios. Today the average credit card interest rate is 14%. That means American seniors who carry credit card debt (on average, $4,786) pay an average of $670 per year in interest charges. Meanwhile, the average investment portfolio earns no more than 8% per year. This means that older debtors will earn just $4,508 from their entire portfolio. Credit card interest eats up more than 15% of the nest egg income.

For some older Americans the problem runs even deeper. One in 10 American seniors has a checking account balance with less than $1,000 and carries credit card debt. This precarious position could leave some seniors unable to recover from larger financial setbacks.

Increased debt loads over time

High levels of consumer debt among older Americans are part of a sobering trend. According to research from the University of Michigan Retirement Research Center, in 1998, 36.94% of Americans age 56-61 carried debt. The mean value of their debt (in 2012 dollars) was $3,634.

Over time debt loads among pre-retiree age Americans are becoming even more unsustainable. Today 42% of Americans age 50-59 have debt, and their average debt burden is $17,623.

Credit card debt carries the most onerous interest rates, but it’s not the only type of debt people carry into retirement. According to research from the Urban Institute, in 2014, 32.2% of adults aged 68-72 carried debt in addition to a mortgage or a credit card, and 18% of Americans age 73-77 still have an auto loan.

Even student loan debt, a debt typically associated with millennials, is causing angst among seniors. According to the debt styles study from the Urban Institute, as of 2014, 2%-4% of adults aged 58 and older carried student loan debt. It’s a small proportion overall, but the burden is growing over time.

According to the Consumer Financial Protection Bureau, in 2004, 600,000 seniors over age 60 carried student loan debt. Today that number is 2.8 million. Back in 2004 Americans over age 60 had $6 billion in outstanding student loan debts. Today they owe $66.7 billion in student loans, more than 10 times what they owed in 2004. Not all that student debt came from seniors dragging their repayments out for 30-40 years. Almost three in four (73%) older student loan debtors carry some debt that benefits a child or grandchild.

Even co-signing student loans puts a retirement at risk. If the borrower cannot repay the loan on their own, then a retiree is on the hook for repayment. A co-signer’s assets that aren’t protected by federal law can be seized to repay a student loan in default. Because of that, Ross says, “We never advise a person to co-sign on a student loan. Never!”

How older Americans can manage debt

High debt loads and an impending retirement can make a reasonable retirement seem like a fairy tale. However, an effective debt strategy and some extra work make it possible to age on your own terms.

Focus on debt first.

Carroll suggests older workers should prioritize eliminating debt before saving for retirement. “Several studies have shown a direct correlation between debt and risk of institutionalization,” he says. Debt inhibits retirees from remodeling or paying for in-home care that could allow them to age in place.

Downsize your lifestyle

As a first step in eliminating debt, seniors should check all their expenses. Some may consider drastic measures like downsizing their home.

Cut off adult children

Even more important, seniors with debt may need to stop supporting adult children.

According to a 2015 Pew Center Research Poll, 61% of all American parents supported an adult child financially in the last 12 months. Nearly one in four (23%) helped their adult children with a recurring financial need.

Wanting to help children is natural, but it can leave seniors financially frail. It may even leave a parent unable to provide for themselves during retirement.

Work longer

Older workers can also eliminate debt by focusing on the income side of the equation. For many this will mean working a few years longer than average, but the extra work pays off twofold. First, eliminating debt reduces the need for cash during retirement. Second, working longer also allows seniors to delay taking Social Security benefits.

Working until age 67 compared to age 62 makes a meaningful difference in quality of life decades down the road. According to the Social Security Administration, workers who withdraw starting at age 62 received an average of $1,077 per month. Those who waited until age 67 received 27% more, $1,372 per month.

Retirees already receiving Social Security benefits have options, too. Able-bodied retirees can re-enter the workforce. Homeowners can consider renting out a room to a family member to increase income.

Consider every option

If earning more money isn’t realistic, a debt elimination strategy becomes even more important. Ross recommends that retirees should consider every option when facing debt, including bankruptcy. He explains, “A 65-year-old, healthy retiree would be well advised to pay down the high-interest debt now. Alternatively, an 85-year-old retiree facing significant health issues is better off filing bankruptcy or just defaulting on the debt. For the older person, their existing assets are a lifeline, and a good credit score is irrelevant.”

Don’t take on new debt

It’s also important to avoid taking on new debt during retirement. “The only exception,” Ross explains, “[is taking on] debt in the form of home equity for long-term medical care needs, but then only when all other reserves are depleted and the person has explored all forms of government assistance such as Medicaid and veterans benefits.”

Every senior’s financial situation differs, but if you’re facing financial stress before or during retirement, it pays to know your options. Conduct your research and consult with a financial adviser, an elder law attorney, or a credit counselor from the National Foundation for Credit Counseling to choose what is right for your situation.

The post Seniors Are Getting Crushed by Debt, New MagnifyMoney Analysis Shows appeared first on MagnifyMoney.

U.S. Mortgage Market Statistics: 2017

Homeownership rates in America are at all-time lows. The housing crisis of 2006-2009 made banks skittish to issue new mortgages. Despite programs designed to lower down payment requirements, mortgage originations haven’t recovered to pre-crisis levels, and many Americans cannot afford to buy homes.

Will a new generation of Americans have access to home financing that drove the wealth of previous generations? We’ve gathered the latest data on mortgage debt statistics to explain who gets home financing, how mortgages are structured, and how Americans are managing our debt.

Summary:

  • Total Mortgage Debt: $9.9 trillion1
  • Average Mortgage Balance: $137,0002
  • Average New Mortgage Balance: $244,0003
  • % Homeowners (Owner-Occupied Homes): 63.4%4
  • % Homeowners with a Mortgage: 65%5
  • Median Credit Score for a New Mortgage: 7546
  • Average Down Payment Required: $12,8297
  • Mortgages Originated in 2016: $2.065 trillion8
  • % of Mortgages Originated by Banks: 43.9%9
  • % of Mortgages Originated by Credit Unions: 9%9
  • % of Mortgages Originated by Non-Depository Lenders: 47.1%9

Key Insights:

  • The median borrower in America puts 5% down on their home purchase. This leads to a median loan-to-value ratio of 95%. A decade ago, the median borrower put down 20%.10
  • Credit score requirements are starting to ease somewhat The median mortgage borrower had a credit score of 754 from a high of 781 in the first quarter of 20126
  • 1.24% of all mortgages are in delinquency. In 2009, mortgage delinquency reached as high as 8.35%.11

Home Ownership and Equity Levels

In the second quarter of 2017, real estate values in the United States surpassed their pre- housing crisis levels. The total value of real estate owned by individuals in the United States is $24 trillion, and total mortgages clock in at $9.9 trillion. This means that Americans have $13.9 trillion in homeowners equity.12 This is the highest value of home equity Americans have ever seen.

However, real estate wealth is becoming increasingly concentrated as overall homeownership rates fall. In 2004, 69% of all Americans owned homes. Today, that number is down to 63.4%.4 While home affordability remains a question for many Americans, the downward trend in homeownership corresponds to banks’ tighter credit standards following the Great Recession.

New Mortgage Originations

Mortgage origination levels show signs of recovery from their housing crisis lows. In 2008, financial institutions issued just $1.4 trillion of new mortgages. In 2016, new first lien mortgages topped $2 trillion for the first time since the end of the housing crisis, but mortgage originations were still 25 percent lower than their pre-recession average.8 So far, 2017 has proved to be a lackluster year for mortgage originations. Through the second quarter of 2017, banks originated just $840 billion in new mortgages.

 

As recently as 2010, three banks (Wells Fargo, Bank of America, and Chase) originated 56 percent of all mortgages.13 In 2016, all banks put together originated just 44 percent of all loans.9

In a growing trend toward “non-bank” lending, both credit unions and nondepository lenders cut into banks’ share of the mortgage market. In 2016, credit unions issued 9 percent of all mortgages. Additionally, 47% of all mortgages in 2016 came from non-depository lending institutions like Quicken Loans and PennyMac. Behind Wells Fargo ($249 billion) and Chase ($117 billion), Quicken ($96 billion) was the third largest issuer of mortgages in 2016. In the fourth quarter of 2016, PennyMac issued $22 billion in loans and was the fourth largest lender overall.9

Government vs. Private Securitization

Banks tend to be more willing to issue new mortgages if a third party will buy the mortgage in the secondary market. This is a process called loan securitization. Consumers can’t directly influence who buys their mortgage, but mortgage securitization influences who gets mortgages and their rates. Over the last five years government securitization enterprises, FHA and VA loans, and portfolio loan securitization have risen. However, private loan securitization which constituted over 40% of securitization in 2005 and 2006 is almost extinct today.

Government-sponsored enterprises (GSEs) have traditionally played an important role in ensuring that banks will issue new mortgages. Through the second quarter of 2017, Fannie Mae or Freddie Mac purchased 46% of all newly issued mortgages. However, in absolute terms, Fannie and Freddie are purchasing less than in past years. In 2016, GSEs purchased 20% fewer loans than they did in the years leading up to 2006.8

Through the second quarter of 2017, a tiny fraction (0.7%) of all loans were purchased by private securitization companies.8 Prior to 2007, private securitization companies held $1.6 trillion in subprime and Alt-A (near prime) mortgages. In 2005 alone, private securitization companies purchased $1.1 trillion worth of mortgages. Today private securitization companies hold just $490 billion in total assets, including $420 billion in subprime and Alt-A loans.14

As private securitization firms exited the mortgage landscape, programs from the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) have filled in some of the gap. The FHA and VA are designed to help borrowers get loans despite having smaller down payments or lower incomes. FHA and VA loans accounted for 23 percent of all loans issued in 2016, and 25 percent in the first half of 2017. These loan programs are the only mortgages that grew in absolute terms from the pre-mortgage crisis. Prior to 2006, FHA and VA loans only accounted for $155 billion in loans per year. In 2016, FHA and VA loans accounted for $470 billion in loans issued.8

Portfolio loans, mortgages held by banks, accounted for $639 billion in new mortgages in 2016. Despite tripling in volume from their 2009 low, portfolio loans remain down 24% from their pre-crisis average.8

Mortgage Credit Characteristics

Since banks are issuing 21% fewer mortgages compared to pre-crisis averages, borrowers need higher incomes and better credit to get a mortgage.

The median FICO score for an originated mortgage rose from 707 in late 2006 to 754 today. The scores on the bottom decile of mortgage borrowers rose even more dramatically from 578 to 648.6

Despite the dramatic credit requirement increases from 2006 to today, banks are starting to relax lending standards somewhat. In the first quarter of 2012, the median borrower had a credit score of 781, a full 27 points higher than the median borrower today.

In 2016, 23% of all first lien mortgages were financed through FHA or VA programs. First-time FHA borrowers had an average credit score of 677. This puts the average first-time FHA borrower in the bottom quartile of all mortgage borrowers.8

Prior to 2009, an average of 20% of all volumes originated went to people with subprime credit scores (<660). In the second quarter of 2017, just 9% of all mortgages were issued to borrowers with subprime credit scores. Who replaced subprime borrowers? The share of mortgages issued to borrowers people with excellent credit (scores above 760) doubled. Between 2003 and 2008 just 27% of all mortgages went to people with excellent credit. In the second quarter of 2017, 54% of all mortgages went to people with excellent credit.6

Banks have also tightened lending standards related to maximum debt-to-income ratios for their mortgages. In 2007, conventional mortgages had an average debt-to-income ratio of 38.6%; today the average ratio is 34.3%.15 The lower debt-to-income ratio is in line with pre-crisis levels.

LTV and Delinquency Trends

Banks continue to screen customers on the basis of credit score and income, but customers who take on mortgages are taking on bigger mortgages than ever before. Today a new mortgage has an average unpaid balance of $244,000, according to data from the Consumer Financial Protection Bureau.3

The primary drivers behind larger loans are higher home prices, but lower down payments also play a role. Prior to the housing crisis, more than half of all borrowers put down at least 20%. The average loan-to-value ratio at loan origination was 82%.10

Today, half of all borrowers put down 5% or less. More than 10% of borrowers put 0% down. As a result, the average loan-to-value ratio at origination has climbed to 87%.10

Despite a growing trend toward smaller down payments, growing home prices mean that overall loan-to-value ratios in the broader market show healthy trends. Today, the average loan-to-value ratio across all homes in the United States is an estimated 42%. The average LTV on mortgaged homes is 68%.16

This is substantially higher than the pre-recession LTV ratio of approximately 60%. However, homeowners saw very healthy improvements in loan-to-value ratios of 94% in early 2011. Between 2009 and 2011 more than a quarter of all mortgaged homes had negative equity. Today, just 5.4% of homes have negative equity.17

Although the current LTV on mortgaged homes remains above historical averages, Americans continue to manage mortgage debt well. Current homeowners have mortgage payments that make up an average of just 16.5% of their annual household income.18

Mortgage delinquency rates stayed constant at their all-time low (1.24%). This low delinquency rate came following 30 straight quarters of falling delinquency, and are well below the 2009 high of 8.35% delinquency.11

Today, delinquency rates have fully returned to their pre-crisis lows, and can be expected to stay low until the next economic recession.

Sources:

  1. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS September 28, 2017.
  2. Survey of Consumer Expectations Housing Survey – 2017,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed June 22, 2017.
  3. Home Mortgage Disclosure Act, Consumer Financial Protection Bureau, “Average Loan Amount, 1-4 family dwelling, 2015.” Accessed June 22, 2017.
  4. U.S. Bureau of the Census, Homeownership Rate for the United States [USHOWN], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USHOWN, September 28, 2017. (Calculated as percent of all housing units occupied by an owner occupant.)
  5. “U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates,” Mortgage Status, Owner-Occupied Housing Units. Accessed September 28, 2017.
  6. Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 28, 2017.
  7. Calculated metric:
    1. Down Payment Value = Home Price* Average Down Payment Amount (Average Unpaid Balance on a New Mortgageb / Median LTV on a New Loanc) * (1 – Median LTV on a New Loanc)
    2. Home Mortgage Disclosure Act, Consumer Financial Protection Bureau, “Average Loan Amount, 1-4 family dwelling, 2015.” Accessed September 28, 2017. Gives an average unpaid principal balance on a new loan = $244K.
    3. Housing Finance at a Glance: A Monthly Chartbook, September 2017.” Page 17, Median Combined LTV at Origination from the Urban Institute, Urban Institute, calculated from: Corelogic, eMBS, HMDA, SIFMA, and Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  8. Housing Finance at a Glance: A Monthly Chartbook, September 2017.” First Lien Origination Volume from the Urban Institute. Source: Inside Mortgage Finance and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  9. Mortgage Daily. 2017. “Mortgage Daily 2016 Biggest Lender Ranking” [Press Release] Retrieved from https://globenewswire.com/news-release/2017/04/03/953457/0/en/Mortgage-Daily-2016-Biggest-Lender-Ranking.html.
  10. Housing Finance at a Glance: A Monthly Chartbook, September 2017.” Combined LTV at Origination from the Urban Institute, Urban Institute, calculated from: Corelogic, eMBS, HMDA, SIFMA, and Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff. Accessed September 28, 2017
  11. Quarterly Report on Household Debt and Credit August 2017.” Mortgage Delinquency Rates, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 28, 2017.
  12. Calculated metric: Value of U.S. Real Estatea – Mortgage Debt Held by Individualsb
    1. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOOREVLMHMV, September 28, 2017.
    2. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, September 28, 2017.
  13. Mortgage Daily, 2017. “3 Biggest Lenders Close over Half of U.S. Mortgages” [Press Release]. Retrieved from http://www.mortgagedaily.com/PressRelease021511.asp?spcode=chronicle.
  14. Housing Finance at a Glance: A Monthly Chartbook, September 2017” Size of the US Residential Mortgage Market, Page 6 and Private Label Securities by Product Type, Page 7, from the Urban Institute Private Label Securities by Product Type, Urban Institute, calculated from: Corelogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff. Accessed September 28, 2017
  15. Fannie Mae Statistical Summary Tables: April 2017” from Fannie Mae. Accessed June 22, 2017; and “Single Family Loan-Level Dataset Summary Statistics” from Freddie Mac. Accessed June 22, 2017. Combined debt-to-income ratios weighted using original unpaid balance from both datasets.
  16. Calculated metrics:
    1. All Houses LTV = Value of All Mortgagesc / Value of All U.S. Homesd
    2. Mortgages Houses LTV = Value of All Mortgagesc / (Value of All Homesd – Value of Homes with No Mortgagee)
    3. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOOREVLMHMV, September 28, 2017.
    4. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, September 28, 2017.
    5. U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates, Aggregate Value (Dollars) by Mortgage Status, September 28, 2017.
  17. Housing Finance at a Glance: A Monthly Chartbook, September 2017.” Negative Equity Share, Page 22. Source: CoreLogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff. Accessed September 28, 2017
  18. Survey of Consumer Expectations Housing Survey – 2017,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed September 28, 2017.

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Average Credit Score in America Reaches New Peak at 700

In late 2016, American consumers hit an important milestone. For the first time in a decade, over half of American consumers (51%) recorded prime credit scores. On the other side of the scale, less than a third of consumers (32%) suffered from subprime scores.1 As a nation, our average FICO® Score rose to its highest point ever, 700.2

Despite the rosy national picture, we see regional and age-based disparities. A minority of Southerners still rank below prime credit. In contrast, credit scores in the upper Midwest rank well above the national average. Younger consumers struggle with their credit, but boomers and the Silent Generation secured scores well above the national average.

In a new report on credit scores in America, MagnifyMoney analyzed trends in credit scores. The trends offer insight into how Americans fare with their credit health.

Key insights

  1. National average FICO® Scores are up 14 points since October 2009.3
  2. 51% of consumers have prime credit scores, up from 48.1% in 2007.4
  3. One-third of customers have at least one severely delinquent (90+ days past due) account on their credit report.5
  4. Average VantageScores® in the Deep South are 21 points lower than the national average (652 vs. 673).6
  5. Millennials’ average VantageScore® (634) underperformed the national average by 39 points. Only Gen Z has a lower average score (631).7

Credit scores in America

Average FICO® Score: 70088

Average VantageScore®: 6739

Percent with prime credit score (Equifax Risk Score >720): 51%10

Percent with subprime credit score (Equifax Risk Score <660): 32%11

Credit score factors

Percent with at least one delinquency: 32%12

Average number of late payments per month: .3513

Average credit utilization ratio: 30%14

Debt delinquency

Percent severely delinquent debt: 3.37%15

Percent severely delinquent debt excluding mortgages: 6.9%16

States with the best and worst credit scores

What is a credit score?

Credit scoring companies analyze consumer credit reports. They glean data from the reports and create algorithms that determine consumer borrowing risk. A credit score is a number that represents the risk profile of a borrower. Credit scores influence a bank’s decisions to lend money to consumers. People with high credit scores will find the most attractive borrowing rates because that signals to lenders that they are less risky. Those with low credit scores will struggle to find credit at all.

The Big 3 credit scores

Banks have hundreds of proprietary credit scoring algorithms. In this article, we analyzed trends on three of the most famous credit scoring algorithms:

  • FICO® Score 8 (used for underwriting mortgages)
  • VantageScore® 3.0 (widely available to consumers)
  • Equifax Consumer Risk Credit Score (used by the Federal Reserve Bank of New York)

Each of these credit scores ranks risk on a scale of 300-850. In all three models, prime credit is any score above 720. Subprime credit is any score below 660. All three models consider similar data when they create credit risk profiles. The most common factors include:

  • Payment history
  • Revolving debt levels (or revolving debt utilization ratios)
  • Length of credit history
  • Number of recent credit inquires
  • Variety of credit (installment and revolving)

However, each model weights the information differently. This means that a FICO® Score cannot be compared directly to a VantageScore® or an Equifax Risk Score. For example, a VantageScore® does not count paid items in collections against you. However, a FICO® Score counts all collections items against you, even if you’ve paid them. Additionally, the VantageScore® counts outstanding debt against you, but the FICO® Score only considers how much credit card debt you have relative to your available credit.

American credit scores over time

Average FICO® Scores in America are on the rise for the eighth straight year. The average credit score in America is now 700.

On top of that, consumers with “super prime” credit (FICO® Scores above 800) outnumber consumers with deep subprime credit (FICO® Scores below 600).

We’re also seeing healthy increases in prime credit scores, defined as Equifax Risk Scores above 720. According to the Federal Reserve Bank of New York, 51% of all Americans have prime credit scores as measured by the Equifax Risk Score. Following the housing market crash in 2010, just 48.4% of Americans had prime credit scores.20

A major driver of increased scores is the decreased proportion of consumers with collection items on their credit report. A credit item that falls into collections will stay on a person’s credit report for seven years. People caught in the latter end of the real estate foreclosure crisis of 2006-2011 may still have a collections item on their report today.

In the first quarter of 2013, 14.64% of all consumers had at least one item in collections. Today, just 12.61% of consumers have collections items on their credit report. Overall collections rates are approaching 2005-2006 average rates.40

Credit scores and loan originations

Following the 2007-2008 implosion of the housing market, banks saw mortgage borrowers defaulting at higher rates than ever before. In addition to higher mortgage default rates, the market downturn led to higher default rates across all types of consumer loans. To maintain profitability banks began tightening lending practices. More stringent lending standards made it tough for anyone with poor credit to get a loan at a reasonable rate. Although banks have loosened lending somewhat in the last two years, people with subprime credit will continue to struggle to get loans. In June 2017, banks rejected 81.4% of all credit applications from people with Equifax Risk Scores below 680. By contrast, banks rejected 9.11% of credit applications from those with credit scores above 760.22

Credit scores and mortgage origination

Before 2008, the median homebuyer had an Equifax Risk Score of 720. In 2017, the median score was 764, a full 44 points higher than the pre-bubble scores. The bottom 10th of buyers had a score of 657, a massive 65 point growth over the pre-recession average.23

Some below prime borrowers still get mortgages. But banks no longer underwrite mortgages for deep subprime borrowers. More stringent lending standards have resulted in near all-time lows in mortgage foreclosures.

Credit scores and auto loan origination

The subprime lending bubble didn’t directly influence the auto loan market, but banks increased their lending standards for auto loans, too. Before 2008, the median credit score for people originating auto loans was 682. By the first quarter of 2017, the median score for auto borrowers was 706.26

In the case of auto loans, the lower median risk profile hasn’t paid off for banks. In the first quarter of 2017, $8.27 billion dollars of auto loans fell into severely delinquent status. New auto delinquencies are now as bad as they were in 2008.28

Consumers looking for new auto loans should expect more stringent lending standards in coming months. This means it’s more important than ever for Americans to grow their credit score.

Credit scores for credit cards

Unlike other types of credit, even people with deep subprime credit scores usually qualify to open a secured credit card. However, credit card use among people with poor credit scores is still near an all-time low. In the last decade, credit card use among deep subprime borrowers fell 16.7%. Today, just over 50% of deep subprime borrowers have credit card accounts.30

The dramatic decline came between 2009 and 2011. During this period, half or more of all credit card account closures came from borrowers with below prime credit scores. More than one-third of all closures came from deep subprime consumers.

However, banks are showing an increased willingness to allow customers with poor credit to open credit card accounts. In 2015, more than 60% of all new credit card accounts went to borrowers with subprime credit, and 25% of all the accounts went to borrowers with deep subprime credit.

State level credit scores

Consumers across the nation are seeing higher credit scores, but regional variations persist. People living in the Deep South and Southwest have lower credit scores than the rest of the nation. States in the Deep South have an average VantageScore® of 652 compared to a nationwide average of 673. Southwestern states have an average score of 658.

States in the upper Midwest outperform the nation as a whole. These states had average VantageScores® of 689.

Unsurprisingly, consumers across the southern United States are far more likely to have subprime credit scores than consumers across the north. Minnesota had the fewest subprime consumers. In December 2016, just 21.9% of residents fell below an Equifax Risk Score of 660. Mississippi had the worst subprime rate in the nation: 48.3% of Mississippi residents had credit scores below 660 in December 2016.35

These are the distributions of Equifax Risk Scores by state:37

Credit score by age

In general, older consumers have higher credit scores than younger generations. Credit scoring models consider consumers with longer credit histories less risky than those with short credit histories. The Silent Generation and boomers enjoy higher credit scores due to long credit histories. However, these generations show better credit behavior, too. Their revolving credit utilization rates are lower than younger generations. They are less likely to have a severely delinquent credit item on their credit report.

Gen X and millennials have almost identical revolving utilization ratios and delinquency rates. Compared to millennials, Gen X has higher credit card balances and more debt. Still, Gen X’s longer credit history gives them a 21 point advantage over millennials on average.

To improve their credit scores, millennials and Gen X need to focus on timely payments. On-time payments and lower credit card utilization will drive their scores up.

A report by FICO® showed that younger consumers can earn high credit scores with excellent credit behavior. 93% of consumers with credit scores between 750 and 799 who were under age 29 never had a late payment on their credit report. In contrast, 57% of the total population had at least one delinquency. This good credit group also used less of their available credit. They had an average revolving credit utilization ratio of 6%. The nation as a whole had a utilization ratio of 15%.39

Sources

  1. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  2. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  3. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  4. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  5. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian. Accessed May 24, 2017
  6. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed May 24, 2017.
  7. 2016 State of Credit Report” National 2016 Average VantageScore®, Experian. Accessed May 24, 2017.
  8. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  9. 2016 State of Credit Report” National 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  10. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  11. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  12. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian. Accessed July 23, 2017.
  13. 2016 State of Credit Report” National 2016 Average Late Payments, Experian. Accessed July 23, 2017.
  14. 2016 State of Credit Report” National 2016 Average Revolving Credit Utilization Ratio, Experian. Accessed July 23, 2017.
  15. Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type, All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  16. Calculated metric using data from “Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type and Total Debt Balance and Its Composition. All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017. Multiply all debt balances by percent of balance 90 days delinquent for Q1 2017, and summarize all delinquent balances. Total delinquent balance for non-mortgage debt = $284 billion. Total non-mortgage debt balance = $4.1 trillion$284 billion /$4.1 trillion = 6.9%.
  17. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  18. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  19. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  20. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  21. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  22. Survey of Consumer Expectations, © 2013-2017 Federal Reserve Bank of New York (FRBNY). The SCE data are available without charge at http://www.newyorkfed.org/microeconomics/sce and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.
  23. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  24. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  25. Quarterly Report on Household Debt and Credit May 2017” Number of Consumers with New Foreclosures and Bankruptcies, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  26. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  27. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  28. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  29. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  30. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  31. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  32. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  33. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  34. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  35. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  36. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  37. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  38. 2016 State of Credit Report” National 2016 VantageScore®, Experian. Accessed July 23, 2017.
  39. Andrew Jennings, “FICO® Score High Achievers: Is Age the Only Factor?” Fair Isaac Corporation. Accessed July 23, 2017.
  40. Quarterly Report on Household Debt and Credit May 2017” Third-Party Collections (Percent of Consumers with Collections), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  41. Quarterly Report on Household Debt and Credit May 2017” Third-Party Collections (Percent of Consumers with Collections), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.

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