MONEY Autos

Can I Get Someone Else to Take Over My Car Loan?

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Getty Images

It all depends on your lender.

If you can’t make your car payments, can you just find someone who can? Credit.com blog reader Carlos asks:

I have had my car for 5 months my payment is $330 but I will soon be getting married and getting my own place. I have tried to advertise my car and have someone take over loan on my car and everyone is just trying to get a notarized agreement and keep the car under my name. I won’t be able to make my next payment.

It sounds like Carlos is hoping is that someone will officially take over his payments and assume his loan. But that may not be possible. “In most cases, car loans are not assumable,” says Edmunds.com Senior Consumer Advice Editor Philip Reed. “When the registration and title are transferred to a new owner, the lender needs to be notified. The lender will then step in and require a credit check to make sure the new owner can make the payments. This leads to the initiation of a new loan at the new owner’s credit level.”

Policies with regard to auto loan assumptions vary by lender. A representative from Wells Fargo said its car loans are not assumable, while a representative from Ally Financial said that it will “work with a customer to determine whether an assumption is an option for them. If the assumption is allowed, the person taking on the finance contract would need to fill out an application to see if they qualify to assume the responsibility of the vehicle and payments.” (Of course, someone who qualifies to assume a car loan can shop for a car and not worry about taking over someone else’s payments.)

That doesn’t mean Carlos couldn’t let someone else drive his car and make payments to him, so he can make the payments to his lender. But that can be risky.

If the person who is driving the car doesn’t pay on time, Carlos will have to try to get the car back; in a sense, he will be repossessing his own vehicle. And anyone who has repo’d cars for a living knows how challenging that can be. In the meantime, he could fall behind on his car loan if he isn’t receiving the funds he needs to make the payments each month. (Here’s a guide that explains what to do if you can’t make your car payments.)

Another concern is that the new driver could put a lot of miles and/or wear and tear on the vehicle. And that, in turn, could make it more difficult for him to sell it in the future.

And then there is the issue of insurance. Carlos would have to make sure the car remains fully insured while registered under his name. One way to do that would be to keep his insurance and add the new driver to his insurance policy. But “if the additional driver has a poor driving history or is young, the rate is likely to increase,” warns Laura Adams, senior insurance analyst for insuranceQuotes.com. Not all insurers will cover an unrelated driver living at a different address, so drivers attempting to do this should check with their own insurance company and shop around first.

Another option would be for the new driver to get insurance and add Carlos on “as an additional insured, so he would be notified of any changes,” says Adams, adding that “Some carriers will allow you to insure a vehicle that you don’t own, as long as you have a good reason.” But that’s also risky. One day (and one accident) without insurance could create a huge financial mess — and damaged credit scores — for Carlos.

Guarding His Own Credit

Finally, there’s the risk that the new driver could run up unpaid tolls or parking tickets that may end up in Carlos’ name since he is the registered owner of the car. One of these items could wind up on his credit reports as a collection account, and his credit scores could drop significantly. A recent settlement with the credit reporting agencies and 31 state attorneys general will change how certain fines are reported in the future. Here’s what the credit reporting settlement will do.

If Carlos has a friend or family member he trusts to take over the payments until he gets back on solid financial footing, letting them assume his car payments might work. But relying on a stranger to make payments, insure the vehicle, and take good care of it is fraught with risk. If he decides to move forward anyway, he will want to get the agreement in writing, get a deposit and make sure the car remains fully insured.

Given his precarious financial situation, though, a better strategy might be to talk with a credit counseling agency or bankruptcy attorney to explore his options for getting out of this car loan.

More from Credit.com:

MONEY credit cards

When No Credit Is Worse Than Bad Credit

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Jetta Productions—Getty Images

A blank credit history could hurt you in the long run.

Although we’re constantly hearing about how much student loan and credit card debt we collectively carry, there are a few of us who don’t have any loans to our names or balances on our cards. Some people even avoid credit cards altogether, assuming it’s better to be completely free of financial products that could potentially lead to trouble.

That’s not a bad way of thinking, but it’s not accurate to say that avoiding credit is better than carrying a dinged-up score. In fact, if you ever face the decision to finance a major purchase (such as when you fill out a mortgage application to buy a home) or need to use your score to prove your ability to pay a monthly bill (like signing the lease on an apartment or setting up some utilities) having no credit at all may causemore problems than having a bad credit score.

What’s wrong with no credit?

When you don’t have any credit, it means you haven’t done anything to establish a credit history. That means you haven’t taken out any loans or lines of credit — again, a good thing considering that means you have no debt either!

But having no credit can hamstring you if you’re looking to get a car loan or a mortgage. A bank or other lender has nothing to go on when evaluating whether you’re likely to pay back the money you borrow. There’s no history to analyze, which turns you into a large question mark for them. Essentially, they’ll need to guess at how likely you are to repay the loan.

Most lenders simply don’t want to do a lot of guesswork when it comes to approving large financing decisions like mortgages.

Bad credit, on the other hand, does give the financial institution considering the loan something to work with — it provides them with information about your habits. Granted, it can show a lender that the borrower is more of a liability, which means that applicant will likely receive a less favorable interest rate. They may pay more in interest over the lifetime of their loan, but they can still receive approval.

When considering this from the perspective of getting approved for a loan, it may be worse to have zero credit at all.

How to responsibly build a (good!) credit history

It’s smart to plan ahead if you know you don’t have a credit history (or if you have a very short history). Give yourself some time to build something good!

Start by taking out a credit card at your bank. This will make it easy to tie your new card to your checking account, so you can view everything in one place and get in the habit of paying off your balances.

Use your credit card consistently over time — and always make sure you’re paying off whatever purchases you put on the card, on time and in full. That being said, don’t use up all your available credit each month (even if you’re paying it all off). Spending up to your credit limit will impact your debt-to-credit utilization ratio, which can hurt your credit score.

You can also become an authorized user on someone else’s credit card if you don’t want your own — but be careful. If that person fails to manage their own credit wisely, yours could be negatively impacted too.

Repairing the damage from a bad credit score

All this being said, a bad credit score isn’t ideal. Bad credit can also hurt in the form of increased costs over the lifetime of a loan — if you’re able to secure one in the first place.

You can check your credit by pulling your report for free, once a year. When it arrives, check it for errors and contact any or all of the three credit bureaus if you find a mistake. If everything looks good, move to step two: Get your credit score by going to a site like Credit Karma or Credit.com.

Is your credit in rough shape? Start repairing the damage by taking the following actions:

  • Make all loan and credit card payments on time and in full.
  • Don’t close old accounts — doing so can affect the average age of your credit history, and the longer you have established lines of credit, the better for your overall score.
  • Keep a low debt-to-credit utilization ratio.
  • Don’t open lots of new accounts at once or incur multiple new hard inquiries on your credit over the span of a few weeks.

It takes some time to improve bad credit, but it’ll be worth the effort. Having a good credit score — and some credit history! — will go a long way to helping you secure a loan at the best interest rate available.

More From Trulia:

MONEY Small Business

It’s the Best Time in Years to Get a Small Business Loan

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Ariel Skelley—Getty Images

Approval rates at big banks are the highest they've been since 2011.

Here’s good news for entrepreneurs: Big banks are becoming a tad more generous with small-business loans.

Major banks and institutional lenders have been approving small-business loans at higher rates, while the pace is holding steady at alternative lenders, according to a report this week from Biz2Credit, an online marketplace for small-business loans.

At banks with more than $10 billion in assets and at institutional lenders — including credit funds, insurance companies and nonbank financial institutions — approval rates on small-business loan applications climbed in June, to their highest level since Biz2Credit began tracking them in 2011, the report says.

On the other hand, approval rates at alternative lenders and credit unions were mostly flat. The report was based on an analysis of 1,000 loan applications on the Biz2Credit platform.

“We’ve come a long way,” Biz2Credit Chief Executive Rohit Arora said in a statement. “These are the best numbers for big bank lending since the recession. … It is a good time for entrepreneurs in search of capital.”

This trend is significant because big banks and lenders pulled back from the small-business market during the financial crisis. Alternative lenders stepped in to fill the void in small-business financing, helping create a vibrant, growing market.

That market has started to draw the attention of traditional banks, but Sam Hodges, founder of alternative lender Funding Circle, says big financing companies are, for the most part, still wary of lending to small businesses.

“We continue to see tremendous pent-up demand from thousands of borrowers every month who aren’t able to get attention from a bank,” Hodges tells NerdWallet.

He points out that the Biz2Credit report paints a limited picture since it was based on a “very small sample size.”

“These data don’t illuminate the market as we see it,” he says. “It’s great that they’re providing these data, and they’re better than nothing, but I don’t think they tell the full story.”

Still, Molly Otter, chief investment officer at Lighter Capital, another alternative lender, says the Biz2Credit report paints an upbeat picture.

“Banks becoming more aggressive in their approvals — I think that is great for business owners,” she tells NerdWallet. “The more options they have, the better off their business is going to be, and banks are currently the cheapest form of debt there is.”

Some key takeaways from the Biz2Credit report:

  • Big banks approved 22.1% of small-business loan requests in June, up slightly from May and the eighth consecutive monthly increase. By comparison, at the lowest point in June 2011, big banks approved only 8.9% of small-business loan applications.
  • Institutional lenders approved 61.4% of small-business loan applications, which is slightly higher than the rate at alternative lenders. Arora says institutional lenders are now mainstream players in small-business loans and are replacing cash advance companies, whose interest rates he calls “simply too high.”
  • Credit unions approved 43% of small-business loans applications, flat from the previous month. While considered a good option for lower-cost loans, credit unions “continue to lag in small business lending,” Arora says.

More From NerdWallet:

MONEY consumer psychology

5 Foolish Money Myths You Can Stop Believing Right Now

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lina aidukaite—Getty Images

Drink your latte.

Whether you think of yourself as money-savvy or you’re acutely aware of where your personal-finance knowledge is lacking, it’s always good to make sure you aren’t managing your money on assumptions that are faulty to begin with.

Here are a few common money myths to kick to the curb.

Myth No. 1: Credit cards are evil

With the average credit card debt sitting at just over $15,000 per household, it’s easy to think that plastic is the irresponsible way to pay. Not so fast.

It’s not the method of payment that’s the problem; in fact, having credit cards can actually help your credit score. A full 10% of your credit score depends upon having a mix of credit types — installment credit, like a car loan, and revolving credit, like credit cards.

In addition, credit cards offer more security than any other form of payment, allowing you to dispute fraudulent activity without footing the bill.

Myth No. 2: Skipping your morning coffee will make you rich

Cutting back on small expenses might offer some breathing room in your budget over the long term, but money not spent doesn’t necessarily equal money saved. To grow that money, it would need to be put into a place where growth can occur — like an investment account or, at the bare minimum, a savings account.

You may think cutting out a daily expenditure is putting you on a path to financial independence, but that’s only step one.

Myth No. 3: It’s too risky to invest your money

The truth opposing this myth is simple — it’s too risky to not invest your money.

If you’re already diligent about socking away money each month, that’s a great start. But with interest rates sitting so low, money put into a savings account will likely lose more to inflation than it can make up in growth. That’s where investing comes in.

Through the power of compounding, a single $500 investment made at the age of 20 earning a conservative 5% return would be $4,492.50 at the age of 65. Imagine that scenario with ongoing contributions and larger returns. It would put any savings account to shame.

Myth No. 4: All debt should be paid before saving

Unfortunately, emergencies and unexpected expenses occur at all stages of life — even when you’re working to pay off student loans or crawl out from underneath credit card debt.

A study recently released by Bankrate found that 60% of Americans wouldn’t have the funds available to cover even small hiccups — like a $500 medical bill or car repair. Think about how many of those expenses you’ve run into in the last six to 12 months; probably at least one.

If you want to avoid incurring more debt as a result of life’s curveballs, work to save while paying off debt. This will give you a better chance of smooth sailing to the finish line.

Myth No. 5: You should borrow the most money offered to you

Wondering how much house you can afford? Don’t let the loan amount offered by the bank be your guiding light.

Those in the business of making loans are incentivized to offer the biggest loan possible that you’ll be approved for. So while they may be checking out your debt-to-income ratio, this simple equation doesn’t always offer an accurate snapshot of what you can actually manage to pay each month.

The same goes for credit card limits — having a $20,000 limit doesn’t mean your finances can easily handle paying back $20,000 worth of purchases.

More From Trulia:

MONEY College

The Right Way to Borrow for Your Kid’s College

mother embracing daughter moving off to college
Xi Xin Xing—Shutterstock

Follow these 3 rules.

With the August start of the school season right around the corner, parents of college-bound kids may have one more financial hurdle to clear: finding a loan to fill the gap between the savings you’ve earmarked for college, your child’s financial aid and student loans, and the big bill that’s coming up fast.

The most popular options are federal parent PLUS loans, private student loans, and a home-equity line of credit. The best one for you comes down to several factors, including how long you need to pay off the loan and your credit history. Here’s how to weigh your choices.

For Flexibility, Pick a PLUS

A federal parent PLUS loan has, well, pluses and minuses. The current interest rate, 6.8%, is high compared to other options, and you’ll owe an origination fee of more than 4%. If you plan to retire the debt in less than a year, the more than $400 you’d pay to take out a $10,000 loan would essentially raise your rate to 11%.

Still, the application process is simple, and the credit requirements are looser than for other loans—your income and credit score aren’t factors. You can take up to 30 years to pay back the loan (though 10 years is standard), and you automatically qualify for repayment breaks if you run into a financial hardship, like a lost job.

For a Low Rate, Go Private

With a private student loan from a bank or credit union, you can beat a PLUS loan’s high rate and avoid origination fees. Traditionally your student takes out this loan, with you as a co-signer. But increasingly many banks, including Wells Fargo and Citizens, are offering private loans directly to parents. Lender SoFi has a borrowing program for parents of students attending one of 2,200 schools.

Variable rates on private loans run from 3% to more than 10%, depending on your creditworthiness, while fixed rates range from 4.5% to double digits. You can deduct up to $2,500 in student loan interest a year on your taxes, as long as your income is below the cap ($160,000 for a married couple filing jointly in 2015).

For Ready Cash, Tap Your Home

Another way to get a low rate is to borrow against your home equity. On average you’ll pay a 4.75% variable rate on a HELOC today, reports Bankrate.com, and just a few hundred dollars upfront.

Trouble is, you’ll pay more for your HELOC once the Federal Reserve starts hiking interest rates. That makes them best if you can pay off the loan quickly. Or lock in. With many lenders, you can convert the outstanding portion of your HELOC to a fixed loan (rates average 6%), leaving the rest of your line available for future costs.

Finally, trust your instincts. “What keeps parents up at night varies,” says Leonard Wright, a California certified public accountant and personal financial specialist. “For some a HELOC takes away the peace of mind of having a paid-off or nearly paid-off home loan. For others there’s peace of mind in having the guaranteed options for payment breaks from a federal loan.”

MONEY

I Can’t Get a Loan Because I’m ‘Dead’

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Alan Thornton—Getty Images

But I'm not dead yet.

There are countless ways your credit report can get messed up, all of which can seem pretty annoying to fix. Perhaps one of the most unsettling problems you might find with your credit report is if it says you’re dead, when you’re most certainly alive. It’s not unheard of for consumers to apply for credit and be rejected because their reports incorrectly list them as deceased. But just like all credit reporting errors, it can be disputed and fixed. Unfortunately, it’s not always a simple process.

Why Your Credit Report Says You’re Dead When You’re Not

There are generally three reasons your credit report might incorrectly say you’re dead, said Robert Brennan, a consumer protection lawyer in Southern California. You’re probably dealing with a mixed file, identity theft or a simple mistake, and your course of action will vary slightly depending on the cause of the problem. Either way, you’re going to need to dispute the error with the credit bureaus.

How to Confirm You’re Not Dead

Obviously, having a credit report that incorrectly marks its subject as deceased can be really problematic for the consumer. Not only is a credit report one of the main documents consulted during lending decisions, it’s also something that may be reviewed by employers, insurance companies, landlords and other service providers, as they decide whether or not to work with you. As a result, you want to fix any credit report errors as soon as you find them. That’s why it’s a good idea to check your credit reports and credit scores as frequently as possible.

Once you realize your credit report says you’re deceased, talk to the credit reporting agencies. The dispute process for each of the three major credit bureaus (Equifax, Experian and TransUnion) is outlined on their websites. Keep in mind that the bureaus do not share information, so you need to check each report for accuracy and dispute issues separately. Brennan said to dispute the error in writing and send it through Certified Mail.

“Provide them with current identification (driver’s license, recent tax return, recent utility bill) and tell them to correct the status to ‘living,’” Brennan said, via email. “If the bureau fails or refuses, then the consumer has rights under the Fair Credit Reporting Act which would include his/her damages plus his or her attorney’s fees.”

What to Do If the Problem Persists

If the error is a result of identity theft, you’ll have more to do than file a dispute with the credit reporting agencies. Victims of identity theft should file police reports, check if fraudulent accounts were opened in their names (and terminate them), put fraud alerts on their credit reports, report the incident to the Federal Trade Commission and contact the IRS for an identity theft PIN to avoid problems during tax season.

It’s important to keep meticulous records throughout the process, because even if you resolve the issue, it could come up again, and you’ll want to be able to prove it’s an error — that will be a lot easier if you don’t have to start from scratch.

More From Credit.com:

MONEY credit cards

A Good Credit Score Isn’t Enough to Get You a Loan

Getty Images/David Young-Wolff

Not even a stellar credit rating can make up for these big no-nos

When it comes to getting loans, having good credit is crucial. A good credit score shows potential lenders that you’re a reliable consumer who pays bills on time and keeps your debt balances at a reasonably low level, so they have good reason to believe you’ll do the same if they extend you credit.

While a great credit score will carry you far in a loan or credit card application, you can’t rely on good credit alone. There are a few situations in which you still might not get a loan or credit card you apply for, even though you have good or excellent credit.

1. If You Don’t Have Enough Income

You don’t necessarily need to have a job to get a loan or credit card, but you generally have to show some sort of ability to repay, whether that’s claiming household income, getting a co-signer or something else. Even if you have income, the lender may determine it isn’t enough to grant you approval for the loan you’re requesting.

The more you’re requesting to borrow, the more your income matters. With credit cards, that information is factored into how high your credit limit will be. If you’re applying for a mortgage, you have to meticulously document your income and get transcripts from the IRS backing that up as part of the loan-application process. Even if you have a good credit history, the main thing that may hold you back from getting a loan is your income.

2. If You Have Too Much Debt

Having too much debt can negatively affect your chances at getting a loan, particularly if you’re applying for a mortgage. When calculating your ability to repay, mortgage lenders look at your debt obligations, including child support, alimony and tax debt, and they subtract that from your income. In some cases, you may have great credit and a high income level, but you have too many debt obligations to take on another loan.

3. If You Already Have a Lot of Unused Credit

Having a lot of unused available credit is good for your credit utilization rate, which has a large impact on your credit score, but in some cases, that’s not something lenders like to see. If a lender sees you have a large amount of available credit when he or she reviews your credit report, it may be cause for rejecting your request for a loan.

Before applying for any new credit, you need to have a good understanding of your finances and what makes up your credit standing. You can do that by regularly reviewing your free annual credit reports, but you can also do more frequent credit checkups.

More From Credit.com

MONEY Debt

Millennials Aren’t Buying Homes, but Not for the Reason You Think

couple looking at house
Troels Graugaard—Getty Images

As student debt has exploded, young consumers are taking out fewer mortgages and auto loans. But are student loans really to blame?

There’s a familiar narrative that the burden of student loans is forcing young borrowers out of the auto and housing markets, crippling their ability to take the same financial steps into adulthood as previous generations.

Think again. A new study from TransUnion says that fears about how much student loan obligations are hindering young borrowers are overblown.

The study looked at consumers aged 18 to 29 who had student loans alongside those who did not, grouped by age and credit score, then tracked their performance on other types of loans in the two years after they started paying off their student debt.

The bottom line: While student loans are way up since the end of the recession, the study found no evidence that such loans are causing young adults to stop opening credit cards, buying new cars, or applying for mortgages. Sure, today’s millennials are doing less of all three than 20- to 29-year-olds did a decade ago—but that’s true whether they’re paying off student loans or not.

According to TransUnion data, the percentage of consumers in their 20s with student debt has jumped from 32% in 2005 to 52% in 2014. The share of student loans in relation to other debt held by young consumers has skyrocketed, too, increasing from 12.9% to 36.8% over the past decade. At the same time, their share of mortgage debt dropped from 63.2% to 42.9%.

But current conventional wisdom about the ripple effect of student debt on other types of borrowing is correlation, not causation, says Charlie Wise, vice president of TransUnion’s Innovative Solutions Group and co-author of the study.

“What we’re trying to do here is cut through the hype and say, ‘what’s the reality?’” Wise says.

The study tracked groups entering repayment at three different times—2005, 2009, and 2012—in an attempt to determine whether performance differed before the recession, immediately following the recession, and more recently as the economy has recovered.

In 2005, a smaller percentage of consumers with student debt had auto loans or mortgages relative to their peers without student loans. But after two years the gap narrowed, and in the case of auto loans, disappeared.

A similar pattern exists for the 2009 and 2012 groups, suggesting that borrowing trends in which individuals with student debt catch up to their peers over a period of a few years have remained steady.

So if student loan debt isn’t causing mortgage and auto loan participation to drop, what is?

Wise points out that about 50% of people aged 18 to 29 have credit scores that qualify them as nonprime borrowers—a percentage that has also held steady since 2005. What has changed, he says, is lending standards, which became stricter in the aftermath of the recession.

The study also shows that young consumers with student debt actually performed slightly better on their new accounts than their peers without student loans.

For example, consumers who started repaying their student loans at the end of 2012 had a 60-day delinquency rate on new auto loans that was 15% lower by the end of 2014 than their peers without a student loan.

The report counters research from a year ago by the Federal Reserve Bank of New York that found home ownership rates dropped more quickly among people aged 27 to 30 who had student debts compared with those who didn’t.

But TransUnion’s findings don’t come entirely out of the blue. A recent Wall Street Journal analysis of data from LoanDepot.com found that loan applicants with student loans aren’t any more likely than those without debt to be turned down for first-time home loans.

And some economists, such as Beth Akers, a fellow at Brookings Institute’s Brown Center of Education Policy, have pointed out that lower participation in the housing market among individuals with student debt is within the historical norm.

Akers says TransUnion’s report that student debt isn’t dooming young borrowers isn’t particularly surprising. “Given the fact that financial returns on investment for higher education are positive and large, the notion that debt is harmful to students is a little puzzling,” she says.

Getting clear answers to the question of how debt affects individuals is challenging, though.

Akers points out that you can’t randomly assign debt to people, and since there are significant differences between the backgrounds and demographics of households with student debt and those without, you can’t expect their behaviors around buying homes or cars to be the same.

Student loan debt may not be overburdening young consumers on a macroeconomic level, she says, but what’s still unknown is the emotional and social cost of carrying such debt.

TransUnion’s Wise describes the study’s findings as encouraging news. For soon-to-be college graduates, there’s evidence that they can stay above water with their loans, and for lenders, there are “credit hungry” millennials who are able to keep up with payments.

Wise’s major takeaway for both groups: don’t despair.

 

More on Managing Student Debt:

The 25 Most Affordable Colleges from MONEY’s Best Colleges
Why You Might Want to Take Student Loans Before Using Up College Savings
8 Ways to Stop Student Loans From Ruining Your Life

MONEY Credit Scores

The One Graph That Explains Why a Good FICO Score Matters for Homebuyers

young couple outside of home
Ann Marie Kurtz—Getty Images

An analysis from an economic policy group estimates that tight credit standards may have prevented 4 million consumers from getting mortgages since 2009.

When it comes to buying a home, there’s a lot more to the process than just finding an affordable home for sale and having enough money for a down payment. Most people need loans to finance such a large purchase, but even as the housing market has rebounded from the foreclosure crisis and low property values of 2010, mortgages remain very difficult to acquire. A report from the Urban Institute, a Washington-based economic-policy research group, concludes that 1.25 million more mortgages could have been made in 2013 on the basis of conservative lending standards practiced in 2001, years before the housing bubble began to inflate.

Whether or not a lender approves a borrower for a mortgage depends on several factors, like income and outstanding debt, but looking at the credit scores of mortgage borrowers during the last several years shows just how tight the market has been post-recession. Here’s how it breaks down.

Urban-Institute-FICO-Score-distribution

The Urban Institute estimates that the stringent credit score standards for mortgage origination resulted in 4 million mortgages that could have been made (but weren’t) between 2009 and 2013. From 2001 to 2013, consumers with a FICO credit score higher than 720 made up an increasingly large portion of borrowers, from 44% of loans in 2001 to 62% in 2013. Consumers with scores lower than 660 made up 11% of borrowers in 2013, but they represented 28% of home loans in 2001.

The study authors note that their calculations do not account for a potential decline in sales because consumers may not see homeownership as attractive as it had been before the crisis.

“Even so, it is inconceivable that a decline in demand could explain a 76% drop in borrowers with FICO scores below 660, but only a 9% drop in borrowers with scores above 720,” the report says.

On top of that, the authors found that tightened credit standards disproportionately affected Hispanic and African-American consumers. In comparison to loan originations made in 2001, new mortgages among white borrowers declined 31% by the 2009-2013 period, 38% for Hispanic borrowers and 50% for African-American borrowers. Loans to Asian families increased by 8%.

Millions of Americans are still feeling the impact of the economic downturn on their credit scores, because negative information like foreclosure, bankruptcy and collection accounts remain on credit reports for several years. Rebuilding the credit and assets necessary to buy a home takes time, particularly in such a tight lending climate, but by regularly checking your credit — which you can do for free on Credit.com — and focusing on things like keeping debt levels low and making loan payments on time, you can start making your way toward a better credit standing.

More from Credit.com

This article originally appeared on Credit.com.

MONEY loans

How to Know How Much Loan You Can Handle

hands holding house made of money
Deborah Harrison—Getty Images

Before you agree to those loan terms, be sure you know what repaying it will do to your accounts.

It’s not uncommon to find yourself in need of a loan to pay for a home, car or other major expense. But navigating the world of lending can be a bit bewildering.

If you’re careful and sensible, it’s possible to borrow money without risking your financial well being. In fact, responsible borrowing can be an integral part of wealth-building. The key is to know how much loan you can actually handle easily. But, how do you determine this?

Know Your Credit Score

Your FICO credit score will play an enormous role in the size of the loan you can qualify for and the interest rate that you will pay. The higher the score, the better off you’ll be. Everyone is entitled to one free credit report each year through annualcreditreport.com, so be sure to examine it if you’re considering taking out a loan. A credit score above 720 usually qualifies you for good rates. Anything less than that, and you may want to consider taking steps to improve your score before borrowing. This means correcting any errors and paying down outstanding debts.

Learn About Debt-to-Income Ratios

The general rule of thumb regarding mortgage loans is to avoid dedicating more than 28% of your monthly take-home income to housing. This includes not just the mortgage payments, but also related taxes and fees, which can add another 2%-3% to the overall cost. So in other words, a person taking home $50,000 should avoid paying more than $1,166 per month toward their home. ($50,000 x 0.28 = about $1,166).

There’s another key factor, however, and that is your overall debt load. The 28% rule above applies to the mortgage loan itself, but financial experts advise having an overall debt-to-income ratio of no more than 36%. So if you already have other loans, you may want to take on a smaller mortgage, or paying them down before borrowing more.

What You’re Approved For Is Not Necessarily What You Should Borrow

When you apply for a loan, a lender will usually let you know how much you are approved to borrow. It’s best to ignore that number. Just because you are approved to borrow $500,000 for a home does not mean it’s wise to go and borrow $500,000. It’s nice to get approval, but banks found themselves in trouble a few years ago when they approved loans for amounts that were well beyond what the borrowers could comfortably afford.

Down Payments Are Key

If you can’t afford to buy a house or other big purchase in cash, at least put down as much money as you can. This will reduce the size of the loan and the amount of interest you will pay. A larger down payment could also make you more attractive to lenders, who can offer a more generous interest rate. When buying a home, a down payment of 20% or more will usually mean you can avoid paying for mortgage insurance.

Look at Loan Length, Not Just Monthly Payments

All too often, borrowers will focus on the monthly payments without looking at the total cost of a loan. The great car buying advice site Edmunds.com advises to keep loan terms to no more than five years, and reports that two additional years on a loan of a Honda Accord would add more than $3,400 in interest charges. Similarly, a 15-year mortgage on a home will save you tens of thousands of dollars over a 30-year term, even if your monthly payments are higher.

Future Income Is Not Guaranteed

I once heard a friend say that they planned to purchase a more expensive home than they could really afford, because they figured they’d be earning more down the road. This is a very risky approach to borrowing. A more sensible approach is to borrow based on your current financial situation, then any extra income you earn over time can go into savings or be used to pay off the debt earlier.

Don’t Steal From Your Future Self

Are you putting away money toward retirement? Would a mortgage payment or other loan prevent you from contributing to an IRA or 401(k)? If you’re making loan payments but are unable to set aside money for the future, then you may be borrowing too much. Set aside 10%-15% of your salary for retirement before seriously considering large loans.

Consider Future Expenses

A couple with no children might crunch some numbers and determine that they can comfortably afford a loan of a certain size, but will their monthly expenses always be what they are now? It’s important when borrowing to try and anticipate future costs, especially when exploring a long-term loan. A good rule of thumb is to assume that your costs will rise yearly with inflation (roughly 2%-3% a year; add more if you expect a larger family, or a move to a more expensive area.)

Read more articles from Wise Bread:

5 Loan Options for Those With Good Credit
Worried About Debt? Tips On Managing Your Loans
5 Strategies To Wipe Out Your Credit Card Balance

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