Auto Loans In Today´s Fiscal Climate
Sharon L. Secor
October 22, 2008
Recent news stories highlight changes in the auto loan industry, yet another aspect of the credit markets to be significantly affected by the current trouble and turmoil in the economy. With both lenders and consumers experiencing a bit of difficulty as they adapt to the new challenges brought by the financial situation of the day, the auto lending picture can look a little bleak picture to the average person. However, looking a little deeper into the current auto lending picture reveals that, while there are certainly changes to be seen in the industry, there are loans available for qualified borrowers.
Trouble In The Auto Loan Industry
Times are tough all over, for consumers, dealers, lenders and auto makers. There are numerous factors in the economy as a whole that are having a negative impact on the automotive manufacturing industry, auto dealerships, automobile lending, and the average consumer. Among these are the tightening of credit, the increase of fuel prices – which, although down recently, have sparked fear in the consumer – the rising cost of living, and assorted fiscal fears and concerns associated with a general economic malaise that seems to be seeping out of the housing market and the world of big finance. People at every level are worried about the potential of such personal finance crisis situations as unemployment or foreclosure.
Compounding these sorts of worries for consumers is the fact that so many are what has come to be called upside-down on their car loans. According to a May 1, 2008, NPR report , "most consumers are carrying much more debt for their car than ever before," says Philip Reed, a consumer adviser for Edmunds.com, an automotive information site. Edmunds.com estimates that nearly a fourth of borrowers are "upside down" in their car loans, meaning the car is worth less than the loan balance."
A contributing factor to this situation was that in the era of looser lending, lenders moved away from the traditional types of loans that required about 20 percent down and also began to increase the length of time that the borrower had to repay the loan. No money down loans and loans that aimed to include most of the fees involved in a new car purchase, which often pushed the amount borrowed to a sum greater than the cost of the vehicle, also became common, as did rolling over back debt into a new loan when trading in an older vehicle for a new one and sub-prime auto loans. As fuel prices increased, the market responded, and vehicles that are heavy fuel users began to fall more quickly in value, something that has also accelerated the trend of upside-down auto loans.
Upside-down loans and financially struggling consumers added to the trouble that lenders have been experiencing as credit throughout the economy tightened up. Already struggling with a lack of liquidity, auto lenders face rising default rates, as borrowers struggle to stay afloat financially with all of the various fiscal pressures they are dealing with in the current economic climate. In an October 18, 2008, Atlanta Journal-Constitution news story, it was reported that "the percentage of auto loans that were past due 60 days or more rose 11.5 percent in the second quarter, compared with last year, according to credit reporting agency Trans-Union." Outstanding loans and delinquencies were also reported to be on the increase.
Changing Lending Standards
The response for some lenders has been to tighten their lending standards significantly, moving towards the more traditional arrangements of the past, which typically included significantly higher down payments. There are a number of lenders, including Capital One, Wells Fargo, and GMAC, that have taken steps towards reducing the number of auto loans that they are currently making. One of the ways that GMAC is reducing auto loan volume is by raising the credit score qualifications that potential borrowers must meet in order to get a loan. Other lenders have simply made their credit opportunities more expensive to the consumer, in an effort to compensate for the higher risk they are taking by extending credit in such economically unstable times.
Best Bet For Your Auto Loan
The news is not all bad, however. Tightened lending standards are, in many ways, better for the consumer. A larger down payment, for example, is a better choice in the long run. The consumer will save money, as the debt will be carried for less time and the amount paid for interest will be less. Furthermore, with all of the media reports about the changes in the auto lending industry, it is all too easy to be left with the impression that getting a car loan is going to be a hassle, if not outright impossible. This is simply not the case.
The perception that car loans are not available has become so common, that General Motors has, according to a recent Associated Press report, "General Motors Corp. is launching a campaign this week to reach people who have stopped looking for cars out of fear that they can't get a loan." Yes, there have been changes to auto lending, but that doesn´t mean that loans can´t be gotten, even by people who need bad credit car loans. There are still options, though it may take a bit more time and effort to get the right auto loan for you.
If it does take a bit more time to find a suitable auto loan, make the most of that time by using it wisely. While loan shopping, take some steps to improve credit standing, such as paying down debt and making a commitment to pay all bills on time. Your credit report features positive information, as well as negative, and the more positive information you can add as a contrast to the not so good information the better. Work on saving money, putting it aside so that you have a larger down payment to offer. Then, you´ll be in a better position when you do find the auto loan that is best for you.
The auto lending industry is certainly going through some changes, a natural response to market conditions. While the era of loose lending is probably past at this point of the business cycle, which is not necessarily a bad thing for consumers. The reason that so many traditional lending standards held on for so long is that they had merit, and not just for the lender. Consumers are also better served by lending standards that help to avoid situations like upside-down loans or payments that are not really affordable and cannot be carried through successfully to the end of the loan period.
Trouble In The Auto Loan Industry
Times are tough all over, for consumers, dealers, lenders and auto makers. There are numerous factors in the economy as a whole that are having a negative impact on the automotive manufacturing industry, auto dealerships, automobile lending, and the average consumer. Among these are the tightening of credit, the increase of fuel prices – which, although down recently, have sparked fear in the consumer – the rising cost of living, and assorted fiscal fears and concerns associated with a general economic malaise that seems to be seeping out of the housing market and the world of big finance. People at every level are worried about the potential of such personal finance crisis situations as unemployment or foreclosure.
Compounding these sorts of worries for consumers is the fact that so many are what has come to be called upside-down on their car loans. According to a May 1, 2008, NPR report , "most consumers are carrying much more debt for their car than ever before," says Philip Reed, a consumer adviser for Edmunds.com, an automotive information site. Edmunds.com estimates that nearly a fourth of borrowers are "upside down" in their car loans, meaning the car is worth less than the loan balance."
A contributing factor to this situation was that in the era of looser lending, lenders moved away from the traditional types of loans that required about 20 percent down and also began to increase the length of time that the borrower had to repay the loan. No money down loans and loans that aimed to include most of the fees involved in a new car purchase, which often pushed the amount borrowed to a sum greater than the cost of the vehicle, also became common, as did rolling over back debt into a new loan when trading in an older vehicle for a new one and sub-prime auto loans. As fuel prices increased, the market responded, and vehicles that are heavy fuel users began to fall more quickly in value, something that has also accelerated the trend of upside-down auto loans.
Upside-down loans and financially struggling consumers added to the trouble that lenders have been experiencing as credit throughout the economy tightened up. Already struggling with a lack of liquidity, auto lenders face rising default rates, as borrowers struggle to stay afloat financially with all of the various fiscal pressures they are dealing with in the current economic climate. In an October 18, 2008, Atlanta Journal-Constitution news story, it was reported that "the percentage of auto loans that were past due 60 days or more rose 11.5 percent in the second quarter, compared with last year, according to credit reporting agency Trans-Union." Outstanding loans and delinquencies were also reported to be on the increase.
Changing Lending Standards
The response for some lenders has been to tighten their lending standards significantly, moving towards the more traditional arrangements of the past, which typically included significantly higher down payments. There are a number of lenders, including Capital One, Wells Fargo, and GMAC, that have taken steps towards reducing the number of auto loans that they are currently making. One of the ways that GMAC is reducing auto loan volume is by raising the credit score qualifications that potential borrowers must meet in order to get a loan. Other lenders have simply made their credit opportunities more expensive to the consumer, in an effort to compensate for the higher risk they are taking by extending credit in such economically unstable times.
Best Bet For Your Auto Loan
The news is not all bad, however. Tightened lending standards are, in many ways, better for the consumer. A larger down payment, for example, is a better choice in the long run. The consumer will save money, as the debt will be carried for less time and the amount paid for interest will be less. Furthermore, with all of the media reports about the changes in the auto lending industry, it is all too easy to be left with the impression that getting a car loan is going to be a hassle, if not outright impossible. This is simply not the case.
The perception that car loans are not available has become so common, that General Motors has, according to a recent Associated Press report, "General Motors Corp. is launching a campaign this week to reach people who have stopped looking for cars out of fear that they can't get a loan." Yes, there have been changes to auto lending, but that doesn´t mean that loans can´t be gotten, even by people who need bad credit car loans. There are still options, though it may take a bit more time and effort to get the right auto loan for you.
If it does take a bit more time to find a suitable auto loan, make the most of that time by using it wisely. While loan shopping, take some steps to improve credit standing, such as paying down debt and making a commitment to pay all bills on time. Your credit report features positive information, as well as negative, and the more positive information you can add as a contrast to the not so good information the better. Work on saving money, putting it aside so that you have a larger down payment to offer. Then, you´ll be in a better position when you do find the auto loan that is best for you.
The auto lending industry is certainly going through some changes, a natural response to market conditions. While the era of loose lending is probably past at this point of the business cycle, which is not necessarily a bad thing for consumers. The reason that so many traditional lending standards held on for so long is that they had merit, and not just for the lender. Consumers are also better served by lending standards that help to avoid situations like upside-down loans or payments that are not really affordable and cannot be carried through successfully to the end of the loan period.
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