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Lenders Loosen Up Car Loans

Sub-prime lending returns – for those willing to pay the price.

by on May.31, 2012

Lenders are returning to the automotive market, according to a new study.

Even in the depths of the Great Recession there were plenty of folks willing and seemingly able to buy new cars.  The problem for many was a lack of loans.  Banks and other lenders all but shut off the spigot, refusing to do business, in some cases, with even the most credit-worthy customers.

While financing still isn’t quite as readily available as it was during the bubble years – when some lenders were willing to offer so-called NINJA loans, for those with no income, no jobs or assets – consumers are once again beginning to find credit easing up, according to a survey by Experian Automotive.

The good news for both new and used car shoppers is that loans are not only more readily available they’re also being offered at lower rates.  Experian’s latest survey also found lenders beginning to wade back into the waters of sub-prime lending – though shoppers with risky credit histories are paying substantially higher rates.

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“During the first quarter of 2012, car shoppers definitely found more favorable conditions for their vehicle loans,” said Melinda Zabritski, director of automotive credit for Experian, which tracks lending and credit. “A reduction in average credit scores, lower interest rates and a lengthening of loan terms are all very good signs for the market and offer great opportunities for consumers looking to make a deal on a new or used vehicle.”

Experian’s latest survey shows the average credit score for a new car buyer was 760 during the first quarter of 2012, down 6 points from the year before.  And for a used vehicle, the average score dropped four points, to 659.

That means it’s still a little tougher than it was prior to the recession to line up a loan.  During the first quarter of 2008, the average score for a new vehicle customer was 753, while it stood at 653 for a used car.

Interest rates also fell, year-over-year, to 4.56% on that new model, and to 9.02% for the average used car – and so-called “super-prime” customers, those with scores above740, were getting loans as low as 4.4%.  Loan terms grew, as well, to an average 64 months for the new model, Experian reported, and 59 months for the used.

The average new car loan rose $589 to $25,995 during the first quarter, with used car shoppers financing $17,050, an increase of $411 year-over-year, according to Experian.

Even those with weak credit scores are now able to line up loans, according to Experian, subprime loans offered to 23% of new vehicle buyers during the first quarter of 2012 and 57% of those purchasing previously-owned cars, trucks and crossovers.  A year ago that was 21% and 55%, respectively.

But the lower the score the higher the interest rate.  Those who Experian defines as deep-subprime, with scores below 550, were paying interest rates averaging 17.9%.  That’s more than four times what the least risky customers are paying.

The Experian data also reveals that banks and credit unions, in particular, have been growing their portfolio of sub-prime loans faster than automaker-owned captive finance subsidiaries.  Overall, banks have been loosening the strings, lowering interest rates and credit score requirements in order to increase their auto loan business, Experian found.

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