What are the ‘Must-Haves’ to Guarantee a Horse Trailer Loan Approval?
It’s not always easy to find financing for your new horse trailer. In fact, since the financial crisis of 2008, Double D Trailers owner Brad Heath has noticed some significant changes in the industry. People who would have easily been approved before are being saddled with incredibly high interest rates or not being approved at all.
This recent difficulty in securing loans has even caused several potential buyers to back out altogether. “We definitely lose customers on a weekly basis due to lack of retail financing,” Brad explained.
We’re posting this article to educate you on how the loan lending has changed in the recent years. Plus, we want to help prepare you with six-steps to get the best loan possible for your new trailer.
How Has Horse Trailer Financing Changed Since 2008?
In the good ol’ days of horse trailer financing, it was no big deal for a potential Double D Trailers customer to fill out a quick loan application at a horse convention while talking with Brad. “I could have a response back from the bank in half an hour to an hour,” Brad remembered. “We could also write contracts on the spot with minimal paperwork.”
Potential horse trailer buyers were usually grouped into categories based on factors like their FICO credit score, debt-to-income ratio (DTI), and lending history. Brad and other horse trailer dealers across the country were able to easily pair the buyer up with a financial institution that could offer a loan.
“Before the world stopped turning in 2008, we (as a dealer) dealt directly with banks. We had a number of banks to work with and could place a client with a lender tailored to the client’s specific need or credit profile.”
Interest rates varied from customer to customer, but generally, it was pretty easy to get clients set up to purchase their new trailer.
Boy…have things changed!
Today, the landscape of the financial loan industry is much different. Banks and credit unions are much more cautious about offering loans to buyers. They have stricter guidelines on who would qualify for a loan and reward anyone ‘on the bubble’ with obscenely high interest rates.
The story is the same across the horse trailer industry. We found many instances of frustrated buyers who were having trouble finding reasonable interest rates or being approved at all to purchase their new trailer.
So Why the Change?
First, you need to understand that a horse trailer is technically considered a ‘recreational vehicle’ by the financial lenders. They don’t see it as something you ‘need’, but rather a luxury item. It would be the first thing to be discarded when finances get tight. They see a horse trailer as a riskier loan option than something like a house or an automobile.
As a result of their stricter lending practices, many people who would have sailed through the approval process in the early 2000’s are having a hard time securing a loan.
Brad explained that a FICO credit score of 730 or higher used to be plenty to get a great interest rate and loan. “It was pretty much a slam duck with that score,” he shared. “However, I’ve had clients today get declined with over 750 FICO scores.”
The credit score is just one element of what lenders typically look for when approving a loan request. We spoke with representatives of Southeast Financial and Highlands Financial to see what factors they consider when approving a loan. They mentioned:
- Credit score
- Debt-to-income (DTI) ratio
- Revolving (credit card) debt
- Age of trailer being purchased
- Loan amount being requested
- Past loan history
- Income (determined by W-2 form or “Proof of Income” on 2 years of tax returns if self-employed)
Brad sees examples of difficult loan approvals on a daily basis for his business. He shared one example of a recent buyer who was denied a loan by Southeast Financial. “The buyer makes $53,820 per year in the medical field, and an additional $15,600 per month from horse boarding. Her credit score on EquiFax shows as 703 and she pays her bills very well. Her DTI is just under 40% with the horse boarding added in.
“The issue with this client was proof of income. She didn't claim the $15,600 on her taxes last year so without two years "proof" of income (which are tax returns or paystubs), the bank doesn't count the income. Even though she has signed rental leases for boarding in place and can provide documentation. She was DECLINED by Southeast Financial.
“I sent the same applicant to another lender (Highlands Financial) and she was approved. Rate of 8.5%, 12 year term, 10% deposit….no proof of income required! So we were able to luckily get an approval, but at a higher interest rate.”
Since this event, we spoke again with a representative of Southeast Financial and they stated that they, “work with all types of credit.” However, the representative did emphasize that any self-employment income needs to be documented with two years of tax returns in order to be approved.
How Are Horse Trailer Loan Interest Rates Different From Home or Auto Loans?
An interest rate of 8.5% over a 12-year term was acceptable to this particular buyer, but may seem high if you’re used to your home mortgage or auto loan rate. Brad explained, “Horse trailer buyers are accustomed (or spoiled rather) to the low interest rates of home mortgages and automobiles, but aren’t up to speed on higher rates associated with ‘recreational vehicles.’”
A typical home mortgage rate may sit around 4.00% while a horse trailer loan can range anywhere from 5.25% all the way up to 17.95%! At these higher rates, Brad even discourages his customers from going through with the loan. “I normally try to talk the buyer out of it.”
Another issue is the increased amount of documentation needed to get approval. The application has changed from a simple handwritten or online application to a complicated approval process.
“Nowadays, there is more paperwork in purchasing a horse trailer than in buying a home!” Brad lamented. He shared just one example of the loan documents for a recent buyer that stretched through 22-pages of content. Understandably, this can be quite frustrating for buyers.
Double D Trailers does its best to minimize the hassle to complete this process. There are several banks throughout the country that are commonly used to secure a loan. Brad added, “We are also happy to work with your local bank rather than any sources we have.”
If you have cash to put towards your new trailer it will be very helpful. “The majority of our clients these days are cash buyers. It’s probably a 25% financed / 75% cash split. Years ago, it was 75% financed / 25% cash split.”
Finally, we send out a cautionary note to those of you who are self-employed. In Brad’s experience, 9 out of 10 small business owners will not qualify for a recreational vehicle loan. The net income shown on their tax return (after subtracting expenses) often isn’t enough to satisfy the banks.
He shared one example. “I had a client recently that owned multiple medical offices and had 3 business partners. All three partners had very, very high FICO scores, but between the three we couldn’t get one of them qualified on a personal RV Loan. Ultimately, they just wrote a check.”
It may seem dire, but there is hope! We’ve compiled this list of 6-steps to help you qualify for a horse trailer loan…
6 Steps to Qualify for Horse Trailer Financing
If you plan to make a purchase, you need to plan in advance:
1) Check Your Existing Loans - Insure all of your loans are current and that you haven't had any "late" pays in at least 12 months.
2) Think About Your Credit Score - Your FICO/Credit score needs to be at least 675 to qualify for most any sort of loan. For the best rates and terms, you will need a 730 score or higher.
3) Find Your Debt-to-Income Ratio - Your debt to income ratio should be less than 40% after adding in the new payment for your horse trailer.
Example of How to Calculate DTI - You make $5,000 per month before taxes. On your credit report, you have a mortgage at $1,100 per month, one auto loan at $650, and no credit card debt. Your total monthly debts you are responsible for are $1,750 (your mortgage and auto loan). $1,750 divided by $5,000 = .35 or 35% DTI. With the new payment of a horse trailer added on, you would fall just below the 40% DTI requirement.
4) Be Careful about Co-Signing on a Loan - If you co-sign with your friend, or child on a loan, you are responsible for that loan and it counts against you on your DTI. This is true even though someone else may faithfully make the payment. In the scenario above where we showed how to calculate DTI, if you co-sign with someone on an auto loan at $500 per month, your DTI suddenly jumps to 45%. This would prevent you from qualifying for the best rate on an RV loan.
5) Consider Your Spouse’s Credit History – The bank considers any debt on your credit report to count against your DTI even if you are sharing that debt with your spouse. That is why it generally takes the income of both spouses to cover the debt. However, if one spouse has excellent credit history and the other has very poor history, the loan will be denied. Make sure that both spouses have good history OR make sure that one person who applies individually has enough income to cover the debt of the couple.
6) Small Business Owners Need “Proof of Income” - If you are a small business owner and plan to borrow money for a horse trailer, insure you show enough profit on your taxes two years straight that your DTI is below 40% after the new payment is tacked on. Also, use best practices when securing auto loans. They should be in the BUSINESS NAME, and not shown under your personal credit. Equipment used in the business should be wrapped in a business loan, not in your personal name.
Using these tips, you are one step closer to securing a loan for your new horse trailer. If you have any questions about the financing process, don’t hesitate to contact us with questions. We’d be glad to discuss your personal situation and help you figure out a plan.