Auto Finance Woes May Create Bargains for Car Buyers
Richard BarringtonLoanBiz Columnist
It was probably more a
question "when" than "if": auto finance trends are starting
to show some of the same signs of delinquencies and defaults that have plagued
the home mortgage business. The dynamics of the two markets are different
enough that would-be auto loan borrowers should not expect the same difficulty
in qualifying for a loan that mortgage borrowers now face. In fact, the
greatest similarity between the two markets may be a positive: both situations
are likely to create bargains for some buyers.
Auto Loan Defaults on
the Rise
At a time when people are having trouble making their mortgage payments, it is not surprising that some are letting their auto loan payments slide. By one estimate, delinquencies have risen so much that repossessions are expected to increase by 10% this year to a total of 1.6 million cars.
Repossessed cars are often sold at auction, and as those auction inventories rise, simple rules of supply and demand dictate that prices will fall. This will benefit used car buyers--and not just those buying at auction. A glut of cars on the market will affect dealer prices and private sellers as well.
Auto Finance Market
Meanwhile, a person looking to buy a car at a bargain price should find that auto finance is still more freely available than mortgages have become. This is because there are some important differences between the mortgage market and auto finance:
- Auto loans are for much shorter terms than mortgages, so the impact of rising defaults is more limited.
- Auto loan payments are generally significantly less than mortgage payments, making it easier for people to qualify based on income, even if tighter standards are applied.
- Auto loans have never depended on a system of loan insurance to provide liquidity, so there is no equivalent to the problems with Fannie Mae and Freddie Mac.
- Many
car companies and even some dealers have affiliations with auto finance
companies, so much of the auto loan market has an extra incentive to keep
financing available.
Tips for Staying on
the Good Side of the Trend
The trend toward lower car prices can benefit buyers, but only if they take steps to avoid becoming part of the default statistics. Here are some tips for staying on the good side of the trend:
- Leave a cushion for unexpected expenses when budgeting for auto loan payments
- Maintain good credit to reduce borrowing expenses
- Never take an auto loan for a longer term than the expected life of the car
- Always shop around for loan terms before committing
Economic conditions have made a wide variety of cars available at every price point, and great deals abound. Just remember that the best car is the one you can afford.
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About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
