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
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
"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
Where do you stand?
Philip Reed, senior consumer advice editor at Edmunds.com,
recommends pre-applying for an auto loan, using online lender
websites, as a basic part of your research.
"The beauty of applying for pre-approved 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
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
"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 low
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.
How big a down payment?
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
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."
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