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Surviving Tougher Auto Loan Standards

Richard Barrington
LoanBiz Columnist

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Following the lead of credit providers in general, auto loan lenders are tightening standards for new loans. Although auto loans have not seen the rising wave of defaults that has swamped the mortgage industry, lenders are concerned that auto loan borrowers may be subject to some of the same economic pressures as mortgage holders. One way lenders are cutting risk is to make it generally more difficult to get a car loan. However, most borrowers should find they still can get access to an auto loan.

Auto Loan Dynamics

Auto loans are subject to different dynamics than mortgages. They are shorter-term in nature, much smaller in size, and less likely to feature the type of variable payments that have tripped up so many mortgage borrowers. All of which should make auto loans less risky than mortgages, but auto loan lenders are exercising an abundance of caution. After all, people who are having trouble making their mortgage payments are going to have less money available for car payments.

What Borrowers Can Expect

Here are some of the ways that tighter standards are showing up in the marketplace:

  • Approval rates are down, especially for non-prime borrowers.
  • Auto loan interest rates for non-prime borrowers may be well in excess of 10%.
  • Minimum credit score standards have been raised, with anything below the cut-off is likely to result in automatic rejection.
  • Lenders are favoring smaller loans with larger down payments.
  • Lending standards are especially tough in regions that have been hard-hit by mortgage foreclosures.

Despite this it is important to remember that the majority of auto loan applications are approved. What can help is knowing what to expect going in.

Preparing to Get a Car Loan

There are several steps borrowers can take when preparing to get a car loan:

  • Check their most recent credit scores.
  • Correct any errors on their credit reports.
  • If necessary, take steps to improve bad credit, and know when any bad history will start to come off the record.
  • Plan on saving up a little more in advance, to both increase the down payment and reduce the size of the loan needed.

Some Good News

Despite tougher lending standards, the news on auto loans isn't all bad. For borrowers with good credit, approval rates are in the neighborhood of 90%, and auto loan interest rates have fallen to 7.2% from 7.7% about six months ago.

While lenders may remain cautious, the nature of the auto loan market makes it less likely than the mortgage market to suffer from widespread defaults. This should keep auto loans flowing for the foreseeable future.

Source:
The Wall Street Journal


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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