For most of us, buying a car involves getting a loan, whether from a bank, a credit union or an auto manufacturer's captive finance company. Whether or not we're approved for that loan is determined by our credit score -- except, in one case. According to a report published by CarsDirect on Friday,
has removed the minimum credit score requirement for its 84-month car
This can be considered problematic for a few reasons. Typically, a minimum FICO score is taken as an indicator, along with other factors like debt-to-income ratio (more on this later), to determine a buyer's ability to repay the loan. Removing that score makes it easier to buy a new car, but it also has the potential to let people get themselves into loans with higher interest rates, which ties that customer to a lengthy repayment plan for an asset that's very likely to depreciate faster than they're paying it down.
It's possible that this change in loan practices could be construed as somewhat predatory, particularly since the change doesn't apply to any of the company's other loan products. We reached out to Ford Credit representatives for comment, and they had this to say:
"Our proprietary scoring models already do an excellent job of assessing the probability that an applicant will be able to pay. FICO is one input to our models. Eliminating the separate FICO requirement opens the prospect of financing to more customers who would qualify for 84-month financing within our models. FICO qualifications are included sometimes as part of marketing programs."
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So, according to that statement, Ford isn't planning on giving out 84-month loans all willy-nilly, which is good. But is an 84-month car loan the right move for you? The answer is, "probably not." Interest rates from Ford Credit on seven-year loans are relatively high at around 5.9%, which means that if you bought yourself a sweet new base Mustang GT for $37,480 (including destination) and you financed the whole thing -- no down payment, no trade-in -- you'd end up paying around $45,192 in total by the end of the seven-year loan period. That's nearly $8,000 in interest alone.
Another downside of an 84-month loan is the simple fact that your loan length is longer than your new car's warranty. This means that if something goes wrong after the basic three-year/36,000-mile bumper-to-bumper warranty, you're on the hook for fixing it while you're still making payments. If your income level dictates needing that long of a loan to afford the monthly payment on your car, this could be a pretty tough pill to swallow.
If you're able to get a lower interest rate on a long-term loan, then the proposition becomes a little more attractive, mainly because the lower monthly payment afforded by a long loan equates to a lower debt-to-income ratio (i.e., you are spending less of your monthly income on payments towards debts). This looks good to other lenders but whether that outweighs the potential negatives is for you to decide.
A better option for many people would be to lease. Lease payments are generally lower than they would be if you bought the car, because you're mostly paying for the vehicle's depreciation rather than the vehicle itself. Leasing is also a good option if you want a new car more often. If leasing doesn't work, you can also consider car subscription services.
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