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Adjusting Auto Loan Expectations

Richard Barrington
LoanBiz Columnist

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As with mortgages, recent years saw something of a lending binge for auto loans. As a component of the car buying process, obtaining an auto loan became something most people could take for granted. This is no longer true and potential car buyers would be wise to understand the changed environment before they start shopping. Nevertheless all car shoppers should not be overly discouraged by tighter lending standards. The majority of applicants will still be able to get a car loan, but it just might take adjusting some expectations about the process.

Changing Auto Loan Standards

Tighter lending standards doesn't just mean more people are turned down for loans. Certainly, many lenders will raise minimum credit scores or impose other hard-and-fast criteria for auto loans, and these tougher standards will exclude some borrowers. However, those are the extremes, primarily affecting would-be borrowers with the worst credit histories. More mainstream borrowers should find they can still get a car loan but that some or all of the following might be different:

  • Interest rates may be higher. One of the most fundamental ways a lender hedges risk is to raise the risk premium. This means charging a little extra interest rate to compensate the lender for a greater default risk. So, while interest rates have fallen in many areas of the economy, borrowers should not necessarily expect to see lower rates on auto loans.
  • Loan terms may be shorter. Risk is generally assumed to increase with time, so one way lenders can reduce risk is to insist on shorter loan terms. Shorter terms translate directly into larger monthly payments and many borrowers will find they can only afford a smaller loan.
  • Down payments may be larger. From the lender's point of view, a larger down payment not only manages risk by reducing the loan principal, but it also demonstrates that the borrower has some financial resources. In addition, a higher down payment increases the incentive for the borrower not to default.

Dealing with Change

All of the above will change the way borrowers may get a car loan, but this does not make the process impossible. For starters, borrowers should get to know how to work an auto loan calculator. An auto loan calculator will facilitate running different scenarios to see how variables like higher interest rates, shorter loan terms, and larger down payments will affect a loan's monthly payment. Also, Internet resources will be vital for sourcing potential lenders. Standards may be tougher but there are still plenty of lenders out there -- most buyers should still be able to get their auto financing. 

Source:
The Chillicothe Gazette


About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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