Financial Literacy and Interest Rates

A recent article in an automotive trade magazine preached the benefits of teaching financial literacy to younger members of society. The purpose, of course, is to enable the a younger population to handle the financial stresses that they will encounter as they get older. Quite simply, most adolescents (and many adults) have no clear idea how to balance a checkbook, develop a good credit rating, or successfully manage credit. One of the areas that many customers question is why the interest rate on a particular vehicle loan is at a certain level. Expectations of low interest rates are often quashed when customers learn how financial institution personnel and computers determine interest rate levels.

Many variables affect the interest rate a particular lender is willing give to a customer. The first and foremost consideration is the customer’s credit or “beacon” score. Credit score has been a subject of many of my previous articles and without rehashing all of the particulars, customers applying for credit need to be aware of their true credit score. A credit score is determined by multiple factors but most importantly the timeliness with which bills are paid. Pay them late and your score goes down. Don’t pay them at all and the score plummets. Pay them on time while carrying a lot of credit and the score remains marginal.

The only place to receive your true credit score is from one of the scoring agencies like Transunion or Equifax. Sites like “freecreditreport.com” use their own scoring system and often inflate scores and mislead customers to sell one of their products. Accordingly, the best thing to do is to start by getting your correct information from a reputable source.

When buying a car, the decision to buy new or used often affects the interest rate. While a customer may save money on the price of a pre-owned vehicle, interest rates are usually higher because the rates are not supported by the manufacturer’s “captive” finance companies. The only exception is with manufacturer’s “certified pre-owned” programs. These vehicles are often supported by special interest rates from the manufacturers as an incentive to attract brand loyalty. The goal is to get a buyer in the seat of one of their products and the attractant is the special interest rate and warranty coverage attached to the make and model of vehicle. To qualify for these rates, customers must possess a better than average credit score. A lower credit score usually translates into a higher interest rate.

Multiple other factors affect may affect your the interest rate. Banks and lenders like to see customers put money down on the purchase. The days of “zero down” are not gone, but are slowly becoming extinct. Down payments are attractive because the purchaser has a little of their own money in the game as a sort of “good faith” in the purchase. When a customer advances money in the form of a down payment, the chances of an early default on the loan are reduced. This makes the customer a better credit risk, and, in turn a better candidate for a lower rate.

Credit score alone is not determinative of the rate that a bank or lender will offer. Many customers have good credit scores because of consistent payment history. However, a closer look at the credit bureau will reveal the customer is barely hanging on. In some circumstances only minimum payments are made to lenders and the debt to income ratio is high. The debt to income ratio can be defined as a calculation that analyzes how much of an individual's monthly income is used for payment of debt. A lot of debt with a lot of income still makes the ratio high and the customer becomes more of a credit risk resulting in a higher interest rate. Additionally, the length a credit file has been established has a bearing on the interest rate. A person with good credit but minimal credit history will probably have a higher interest rate. This occurs because the lender cannot make an accurate assessment of risk based on the limited credit information in the file.

I was able to write down about twenty-five other factors that were considerations for interest rate levels before writing this article. Of course, most of this is determined from an algorithm in a computer database that crunches the individual factors and then returns a proposed loan amount and interest rate. Human credit analysts still assist and make individual determinations. Because of space limitations, I cannot include them all but other considerations should be noted. Some other factors that the computers and the analysts consider will be:

• Accounts being individual or joint;
• Total monthly and household income;
• Current employment status and length of time with an employer;
• Educational level;
• The length or term of the loan;
• Previous car credit and length of car credit;
• Ownership or rental of residence;
• Length of time the credit file has been established.

All of the items that are determinative of your interest rate may also affect your credit score. Educating yourself and being financially literate will assist you in paying down debt and raising your credit score. Then the next time you apply for a car loan you can be one of the people who falls into the category of “a well qualified buyer” that is always refered to in the hastily spoken disclaimer at the end of the advertisement. For more information on this and other topics visit my blog at www.walkerwill.blogspot.com.

Another Toyota Recall

From Today's Wall Street Journal

Toyota Motor Corp. is recalling 412,000 passenger cars, mostly the Avalon model, in the U.S. for steering problems in which three accidents have been reported, the auto maker said Thursday. The 373,000 Avalons being recalled range from the 2000 model year through to 2004 and have improper casting of the steering lock bar—a component for the steering system—causing cracks to develop on the surface. In some cases, the crack can cause the lock bar to break, potentially leading to a crash if the steering wheel locks, the world's No. 1 auto maker by car sales said. The latest recall comes on top of some 8.5 million vehicles that have been recalled around the world by Toyota since October for a spate of problems, including faulty floor mats, defective gas pedals and braking software glitches.

More Toyota Trouble

Toyota to fix over 735,000 cars outside recall



Wed, Jul 14 2010

* 2001-2003 RAV4 models may experience uneven shifting
* 2009-2010 Matrix, Corolla models may have steering issue
* Technical service bulletin issued for Matrix, Corolla
* Matrix, Corolla, and RAV4 issues did not lead to recalls (Recasts to include technical service campaign for 500,000 Matrix and Corolla issues; adds Toyota confirmation, comment)

By Bernie Woodall and Soyoung Kim

DETROIT, July 14 (Reuters) - Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) said on Wednesday it will extend warranties on about 235,500 RAV4 vehicles and address steering complaints on as many as 500,000 late model Matrix and Corollas in the United States.
Toyota is taking the action to repair vehicles outside the channel for recalls tracked by U.S. regulators because it does not consider the reported problems to be safety issues.

Drivers of 2001 to 2003 model year RAV4s equipped with automatic transaxles may experience a "harsh shift" or have a dashboard light turn on indicating a malfunction, Toyota said in a notice to U.S. dealers.

Meanwhile, drivers of about a half million U.S. Matrix and Corolla vehicles from model years 2009 and 2010 may experience steering drift, the company said.

U.S. Toyota dealers will fix the steering for owners who complain, said Toyota spokesman Brian Lyons. He said the matter was not a safety issue but one of customer satisfaction.

In February, when the U.S. National Highway Traffic Safety Administration had opened a preliminary investigation into complaints over steering issues on the Corolla and Matrix.

At the time, NHTSA had received 168 consumer complaints about the steering issue linked to eight crashes and 11 injuries.

Toyota has said Corollas made in Japan and Europe had different parts for steering than the affected models sold in North America.

Lyons did not provide an estimate of how much the repairs would cost Toyota.

The automaker estimated that fixing the steering would take about four hours representing a labor bill of about $350 per fix based on average dealer costs.

RAV4 SHIFTING ISSUES

Meanwhile, owners of RAV4s covered by the extended warranty will be sent a letter this month advising them to bring their vehicle to a dealer to be examined if they have experienced a problem with shifting.

Toyota will pay for repairs and extend warranties of the affected RAV4s, the note sent to dealers said.

The notice of the vehicle repair campaign was sent to Toyota's U.S. dealers on Monday. A copy of the Toyota "Customer Support Program" was obtained by Reuters.

Major automakers often extend warranty terms or notify dealers that they will pay for repairs that they judge to be unrelated to the kinds of safety issues covered by recalls.

Toyota's RAV4 warranty campaign comes after a series of high-profile recalls that have damaged the automaker's reputation for quality. More than 10 million Toyota and Lexus models have been recalled since last fall worldwide.

Toyota said that solder in one of the circuits on the RAV4's engine control module is at risk for peeling over time.

In most cases, dealers would be able to fix any vehicle problems by replacing the engine control module, an onboard computer, Toyota said.

In some cases, dealers will also have to replace the automatic transaxle on affected RAV4s, Toyota said.

Hundreds of U.S. consumer complaints have been filed with the National Highway Traffic Safety Administration about transmission-related problems with the RAV4.

In some cases, drivers have complained of repair bills of several thousand dollars or sluggish acceleration that put them in dangerous situations.

One driver of a 2002 RAV4 told U.S. regulators that in March 2007 he was involved in a minor accident after the "automatic transmission went crazy and (the) car started lunging forward and then not going when it should."

"We have not felt safe enough to even keep the car on the road," the consumer told NHTSA.

No other Toyota, Lexus or Scion models are impacted by the issue, Toyota said in its notice to dealers.

RAV4 owners who have already paid for repairs can apply to be reimbursed, Toyota said. New repairs must be made at Toyota dealerships. (Reporting by Bernie Woodall and Soyoung Kim; Editing by Leslie Gevirtz and Richard Chang)