Subprime borrowers have easier time getting car loans
If you have blemished credit, you can expect a hard time opening
a new credit card account. But getting an
auto loan? That's a different story.
Auto loans have come roaring back, and less-than-prime
borrowers are invited to the party. That's creating new opportunities to get out of a
clunker -- maybe at a less painful rate than you'd expect to pay.
"There's more subprime (auto lending) today even than
right before the recession," said Melinda Zabritski, senior director of
automotive credit at Experian.
Borrowers with credit scores below 680 got about 27 percent
of new car loans in the second quarter of 2013, Experian found, vs. 25 percent
in 2007. Contrast that with auto lending
during the depths of the downturn. About midway through 2009, the share of nonprime
loans was about 17.5 percent of new vehicle financing. "That's a big
difference," Zabritski said.
There's also a big difference between auto loans and credit
card lending. Since mid-2009, auto loan
balances have grown by $71 billion, while balances on credit cards fell $156
billion, according to the Federal Reserve Bank of New York. At least some of the difference is due to
easing of standards for auto loans. Auto lenders made $21.2 billion in new- and
used-car loans to subprime borrowers with scores under 620 during the second
quarter of 2013, according to the New York Fed -- more than double the amount during the same
period in 2009.
The figures indicate that subprime borrowers, who were
formerly limited to the used-car market and high-rate
loans, have more opportunities to roll out of dealerships on new wheels.
How to take advantage of the trend? While there are growing
opportunities to look beyond used-car lots and buy-here, pay-here financing, which
cater to subprime borrowers, there are still steps you should consider in order
to get a square deal. Researching your
creditworthiness before you shop for financing is a basic first step, experts
say. You can get an estimated credit score online and review your full credit report via AnnualCreditReport.com.
Where do you stand?
Philip Reed, senior consumer advice editor at Edmunds.com,
recommends preapplying for an auto loan, using online lender websites, as a basic
part of your research.
"The beauty of applying for preapproved loans is, it's
like running your credit," Reed said. "There are online lenders that
will give you a credit limit and an interest rate." Armed with those
figures, you can step onto the asphalt of a car lot with greater confidence. Since this is a loan application, it will show
as a hard pull on your credit record, which marginally lowers your credit
score. As you shop for financing,
however, subsequent car loan applications will be consolidated with this one and
scored as a single pull.
"If the interest rates available (online) were about 6
percent, and you go into a dealership and they offer you 8 (percent), you know
something isn't right," Reed said.
But if you show them the quote you got from a competing lender, the
dealer may say, 'We can beat that.'"
Gerry Ryan, general manager at Sport Chevrolet in Silver
Spring, Md., says he sees lenders acting more competitive.
"Banks are taking a hard look at stuff -- money's
becoming more available," he said. At his car lot, the lenders Ally, Wells
Fargo and GM Financial are all vying to make loans through the dealership,
"so they've got to be on their toes."
The state of rates is
Often a loan through the dealership's financing office will
end up being the most economical choice, experts say. But getting quotes
independently from a bank or credit union is also important -- both for
research and as a negotiating tool.
While promotions on some vehicles tout 0-percent financing,
those deals are limited to a narrow slice of applicants with top credit scores.
Across all borrowers, the average rate
for a new vehicle loan was 4.46 percent in the second quarter, Experian
"The overriding good news is, when rates go down, they go
down in all of the credit tiers," Reed said. "There was a time when 6
percent was a good rate for even prime borrowers."
Zabritski said that,
for some credit tiers, rates have already changed direction and are edging back
upward. For deep subprime borrowers with scores 550 and below, average rates
were about 13.4 percent, compared to 13 percent a year earlier.
Another way for auto borrowers to help their cause is to save
for a down payment. As a rule of thumb,
banks will require 15 percent down on a new car loan, and experts say it's a
better idea to put down 20 percent.
Banks are taking a hard look at stuff -- money's
becoming more available.
|-- Gerry Ryan
Sport Chevrolet, Silver Spring, Md.
How big a down
In addition to helping you qualify for the loan, the down
payment insulates you from the steep loss of value that new vehicles experience
in their first year of ownership. Otherwise, you risk owing more on your vehicle
than it is worth on the resale market. A
new car "will depreciate at least 20 percent in the first year ... you
prepaid that," Reed said.
The length of term for auto loans is getting longer, with 65
months now typical, Experian says. Longer
term loans are generally less economical because of higher interest costs, but
Reed noted one exception. If you are in the midst of turning your credit
around, you might go into a lengthy loan now, expecting to refinance in a year
or so when your score improves. In this
case, make sure you get a loan that lets you pay off early without a prepayment
penalty. Although it is rare, some auto
loans may require you to pay part or all the interest you would avoid by paying
Another way to keep your total cost down -- and your odds of
loan approval up -- is to skip the extras and options, experts say. Costs of new vehicles are climbing largely
because of options that add significantly to the bottom line. The average new vehicle cost $31,657 in
August, $221 more than a year ago, according to Kelley Blue Book.
Karl Bauer, senior
analyst at Kelley, said it is no hardship for buyers to skip the high-end
options, because new cars and light trucks in base configurations already
represent a good value.
"A lot of people think they need to get the most loaded
version of the vehicle -- you really don't," he said. "Technology is making them better, not
just the top-of-the-line version."
He recalled a test drive he took in a six-cylinder Dodge Durango that had
a lower sticker price than many other full-size SUVs, but exceeded his
expectations. "There's a V-8 (version)," he said, "but my
reaction is, save your money."
See related: What to expect when buying a car with bad credit
Published: September 19, 2013
Three most recent Bad credit, credit repair stories:
- Why the wealthy go broke, too – When people with above-average incomes encounter financial hardships, the reasons are surprisingly similar to people with more modest incomes ...
- 7 times to put yourself in credit card timeout – There are key moments in life when putting away the cards and paying off any balances can be the best moves for your financial future ...
- 6 signs of bad financial advice – While good sound nuggets of money advice can help you keep money in your pocket, bad advice can leave you digging out of financial hole ...